TRIPLE A & GOVERNMENT SERIES 1997 INC, N-2/A, 1995-08-30

TRIPLE A & GOVERNMENT SERIES 1997 INC
N-2/A, 1995-08-30

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<PAGE>

As filed with the Securities and Exchange Commission on August 30, 1995

Securities Act File No. 33-50996
Investment Company Act File No. 811-6656
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

------------

FORM N-2

Registration Statement Under the Securities Act of 1933 /x/

Pre-Effective Amendment No. / /

Post-Effective Amendment No. 3 /x/

and

Registration Statement Under the Investment Company Act of 1940 /x/

Amendment No. 7 /x/

(Check appropriate box or boxes)

------------

TRIPLE A AND GOVERNMENT SERIES - 1997, INC.
(Exact name of Registrant as specified in charter)

1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)

Registrant's Telephone Number, including Area Code: (212) 713-2000

------------

DIANNE E. O'DONNELL, ESQ.
Vice President and Secretary
TRIPLE A AND GOVERNMENT SERIES - 1997, INC.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)

------------
Copies to:

ROBERT A WITTIE, ESQ. GREGORY K. TODD, ESQ.
KIRKPATRICK & LOCKHART LLP Mitchell Hutchins Asset
1800 M Street, N.W. Management Inc.
Washington, D.C. 20036 1285 Avenue of the Americas
New York, New York 10019

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: /x/

It is proposed that this filing will become effective (check appropriate
box) /x/ when declared effective pursuant to Section 8(c).

<PAGE>
TRIPLE A AND GOVERNMENT SERIES - 1997, INC.

Form N-2 Parts A and B Cross Reference Sheet
<TABLE>
<CAPTION>

Item Number Caption Prospectus Caption

<S> <C> <C>
1. Outside Front Cover............ Outside Cover of Prospectus
2. Inside Front and Outside Back
Cover Page..................... Inside Front and Outside Back
Cover Page of Prospectus
3. Fee Table and Synopsis......... Series Expenses; Prospectus
Summary
4. Financial Highlights........... Financial Highlights
5. Plan of Distribution........... Outside Front Cover; The Offering
6. Selling Shareholders........... Not Applicable
7. Use of Proceeds................ Use of Proceeds
8. General Description of
Registrant..................... Trading History; The Series;
Investment Objective and Policies;
Special Considerations and Risk
Factors; Investment Limitations;
Description of the Shares
9. Management..................... Management of the Series;
Custodian, Transfer and Dividend
Disbursing Agent and Registrar;
Description of the Shares
10. Capital Stock, Long-Term Debt
and Other Securities........... Dividends and Other Distributions;
Reverse Splits; Valuation of Shares;
Description of the Shares; Taxation
11. Defaults and Arrears on Senior
Securities..................... Not Applicable
12. Legal Proceedings.............. Not Applicable
13. Table of Contents of the
Statement of Additional
Information.................... Not Applicable
14. Cover Page..................... Not Applicable
15. Table of Contents.............. Not Applicable
16. General Information and History Not Applicable
17. Investment Objectives and
Policies....................... Investment Objectives and Policies;
Portfolio Transactions
18. Management..................... Directors and Offices
19. Control Persons and Principal
Holders of Securities.......... Control Persons and Principal
Holders of Securities
20. Investment Advisory and Other
Services....................... Investment Advisors; Experts;
Management of the Series; Custodian,
Transfer and Dividend Disbursing

Agent and Registrar
21. Practices...................... Portfolio Transactions
22. Tax Status..................... Taxation
23. Financial Statements........... Financial Statements
</TABLE>

<PAGE>

TRIPLE A AND GOVERNMENT SERIES--1997, INC.
COMMON SHARES

------------------------

Triple A and Government Series--1997, Inc. ('Series') is a diversified,
closed-end management investment company. The investment objective of the Series
is to manage a portfolio of U.S. government securities and AAA-rated and
comparable debt obligations in order to return to Reinvesting Shareholders, on
the Series' Termination Date, $10.00 for each share of common stock ('Share')
that such Reinvesting Shareholders held on June 24, 1993, while providing high
monthly income in comparison to bank certificates of deposit having maturities
no longer than the term of the Series and in comparison to money market funds.
If the Series achieves its investment objective and if, as currently
anticipated, Reverse Splits are declared in connection with the Series'
Reinvestment Dividend, the Series would return $10.00 per Share to all
shareholders for all Shares that it holds as of the Series' Termination Date.
However, non-Reinvesting Shareholders would hold a smaller number of shares on
the Termination Date than they originally purchased. See 'Management of the
Series.'

The Termination Date for the Series will be June 29, 1997. No assurance can
be given that the Series will be able to achieve its investment objective.
Under current conditions, it is anticipated that the Series would not be able to
distribute $10.00 per Share on its Termination Date unless Mitchell Hutchins
makes a cash payment to the Series, which it is currently considering. See
'Management of the Series.' Shares of the Series are not insured or guaranteed
by the U.S. government or any other entity.

The Target Return for the Series has been lowered to 5.0% (calculated as a
per annum rate of return on $10.00 per Share). See 'Investment Objective and
Policies.' The Series intends to distribute any net investment income in excess
of monthly income dividends paid to shareholders, and any capital gains realized
by the Series, through annual Reinvestment Dividends that will be paid in
additional Shares of the Series unless a shareholder elects to receive them in
cash. Shareholders who elect to receive such Reinvestment Dividends in cash will
not necessarily achieve, and should not expect, investment results similar to
those achieved by shareholders who accept such dividends in additional Shares.
Shares of the Series are intended as investments for investors who are willing
and able to retain their Shares until the Series' Termination Date. The Series
is authorized to engage in leverage, which would involve special risks. SEE
'INVESTMENT OBJECTIVES AND POLICIES--LEVERAGE AND BORROWING.'

The Shares offered hereby were issued and sold by the Series in an initial
public offering in July, 1992 and are listed and traded on the American Stock

Exchange, Inc. ('Amex') under the symbol 'TGB'. Shares of the Series may be
offered pursuant to this Prospectus from time to time in order to effect
over-the-counter secondary market sales of Series' Shares by PaineWebber
Incorporated in its capacity as a dealer and secondary market-maker at
negotiated prices related to prevailing market prices on the Amex at the time of
sale. On August 11, 1995, the closing price on the Amex for the Series Shares
was $9.50. See 'Trading History.' The Series will not receive any proceeds from
the sale of any Shares offered pursuant to this Prospectus.

Mitchell Hutchins Asset Management Inc. serves as investment adviser and
administrator of the Series, and Mitchell Hutchins Institutional Investors Inc.
acts as sub-adviser for the Series. The address of the Series is 1285 Avenue of
the Americas, New York, New York 10019, and the telephone number of the Series
is (212) 713-2000.

This Prospectus sets forth certain information an investor should know
before investing and should be retained for future reference.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PAINEWEBBER INCORPORATED
------------------------

THE DATE OF THIS PROSPECTUS IS , 1995

<PAGE>
SERIES EXPENSES

The following tables are intended to assist investors in understanding the
various direct or indirect costs and expenses associated with investing in the
Series.

SHAREHOLDER TRANSACTION EXPENSES

Sales Load (as a percentage of offering price)(1)........................... None
Dividend Reinvestment and Cash Purchase Plan Fees........................... None

ANNUAL EXPENSES(2)

Investment Advisory and Administration Fees................................. 1.00%
Other Expenses.............................................................. 0.45%
-----

Total Annual Expenses................................................ 1.45%
=====
</TABLE>

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<TABLE>
<S> <C>
(1) Prices for Shares traded in the over-the-counter ('OTC') market will
reflect ordinary dealer mark-ups.
(2) See 'Management' for additional information. The investment advisory and
administration fees payable to Mitchell Hutchins Asset Management Inc.
('Mitchell Hutchins') are higher than those paid by most funds. All
expenses are those that would have been experienced by the Series for the
fiscal year ended June 30, 1995 had Mitchell Hutchins not reimbursed the
Series for all of its operating expenses and waived all of its advisory and
administration fees.
</TABLE>

EXAMPLE

An investor would directly or indirectly pay the following expenses on a
$1,000 investment in the Series, assuming a 5% annual return:

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>

$ 15 $ 46 $ 79 $ 174
</TABLE>

This Example assumes that all dividends and other distributions are
reinvested at net asset value and that the percentage amounts listed under
Annual Expenses remain the same in the years shown (except that Annual Expenses
have been reduced to reflect the completion of organization expense amortization
after five years from the commencement of investment operations). The above
tables and the assumptions in this Example of a 5% annual return and
reinvestment at net asset value are required by regulations of the Securities
and Exchange Commission ('SEC') applicable to all closed-end investment
companies; the assumed 5% annual return is not a prediction of, and does not
represent, the projected or actual performance of the Shares. Since the Series
has a limited term of existence and will terminate in June 1997, investors would
not pay direct or indirect expenses for the full extent of the periods
indicated.

THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND THE SERIES' ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.

2
<PAGE>
PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus. Investors should
carefully consider information set forth under the heading 'Special
Considerations and Risk Factors.'

The Series...................... Triple A and Government Series-1997, Inc.
('Series') is a diversified, closed-end
management investment company. See 'The
Series.'

The Offering.................... Shares of the Series' common stock ('Shares')
may be offered pursuant to this Prospectus
from time to time in order to effect
over-the-counter ('OTC') secondary market
sales by PaineWebber Incorporated
('PaineWebber') in its capacity as a dealer
and secondary market-maker at negotiated
prices related to prevailing market prices on
the American Stock Exchange, Inc. ('Amex') at
the time of sale. The Shares are listed and
traded on the Amex under the symbol 'TGB.'
The Series will not receive any proceeds from
the sale of any Shares offered pursuant to

this Prospectus. Proceeds received by
PaineWebber as a result of its secondary
market sales of the Shares will be utilized by
PaineWebber in connection with its secondary
market operations and for general corporate
purposes. See 'The Offering,' 'Use of
Proceeds' and 'Trading History.'

Termination Dates; Termination
Distributions................. The Termination Date for the Series will be
June 29, 1997. The Series intends to make a
final distribution to shareholders
('Termination Distribution') in an amount
equal to the net liquidation proceeds of the
Series' assets on or about the Series'
Termination Date. See 'The Series' and
'Dividends and Other Distributions; Reverse
Splits.'

Investment Objective
and Policies.................. The investment objective of the Series is to
manage a portfolio of U.S. government
securities and AAA-rated and comparable debt
obligations in order to return to Reinvesting
Shareholders (as defined below), on the
Series' Termination Date, $10.00 for each
Share that such Reinvesting Shareholders held
on June 24, 1993 ('Targeted Shares'), while
providing high monthly income in comparison to
bank certificates of deposit ('CDs') having
maturities no longer than the term of the
Series and in comparison to money market
funds. No assurance can be given that the
Series will be able to achieve its investment
objective. Shares of the Series are not
insured or guaranteed by the U.S. government
or any other entity.

Shares are intended as investments for
investors who are willing and able to retain
their Shares until the Series' Termination
Date. Series Shares are not CDs. Unlike CDs,
Shares are not insured by an agency of the
U.S. government, and unlike money market
funds, the net asset value of Series Shares
will fluctuate. Unlike CDs, there is no
assurance that the Series will achieve its
investment objective, including the return of
$10.00 per Targeted Share on or about its
Termination Date, or that the Series will be
able to pay its Target Return to Reinvesting
</TABLE>

3
<PAGE>

Shareholders. Unlike investors in most CDs,
Series shareholders who receive Reinvestment
Dividends in additional Series Shares in any
year will have taxable income from their
investments in the Series that generally will
exceed the cash that they receive from the
Series in that year. If the Series achieves
its investment objective, a portion of the
$10.00 per Share received by Reinvesting
Shareholders will represent amounts that
previously were paid as dividends and capital
gain distributions and that were reinvested in
additional Shares rather than a return of
originally invested capital. See 'Taxation.'

As used herein, a Reinvesting Shareholder is
an investor who: (1) reinvests all
Reinvestment Dividends on Targeted Shares in
additional Series Shares; and (2) retains all
such Shares until the Series' Termination
Date. Because the investment objective of the
Series is directed toward achieving the Target
Return for Reinvesting Shareholders, other
investors will not necessarily achieve, and
should not expect, similar investment results.

During 1994, the Series' Target Return was
lowered to 5.0% (calculated as a per annum
rate of return on $10.00 per Share) from 6.5%.
This reduction reflected the judgment of the
board of directors (the 'Board' or 'Board of
Directors') of the Series that a lower rate
for the Series' regular monthly cash dividends
('Cash Dividends') was consistent with the
Series' goal of returning $10.00 per Share to
Reinvesting Shareholders on the Series'
Termination Date. However, there can be no
assurance that the income being generated by
the portfolio or the present Target Return
will be maintained, and the Board may
determine that a further reduction of the
Series' Target Return is necessary or
appropriate.

The Series intends to distribute any net
investment income in excess of its Target
Return, and any realized capital gains by the
Series, through annual dividends
('Reinvestment Dividends') that will be paid

in additional Shares of the Series unless a
shareholder elects to receive them in cash. If
the Series achieves its investment objective
and if, as currently anticipated, Reverse
Splits (as hereafter defined) are declared in
connection with the Series' Reinvestment
Dividends, the Series would return $10.00 per
Share to all shareholders for all Shares that
they hold as of the Series' Termination Date.
However, non-Reinvesting Shareholders would
hold a smaller number of Shares on the
Termination Date than they originally
purchased.

The Series normally invests its assets
exclusively in: U.S. government securities,
which include U.S. Treasury obligations and
mortgage-backed and other securities issued or
guaranteed by U.S. government agencies or
instrumentalities; U.S. dollar-denominated
debt obligations issued by U.S. or foreign
private issuers or by supra-national entities
(such as the World Bank) that at the time of
purchase are rated at least AAA by Standard &
Poor's ('S&P') or Aaa by Moody's Investors
Service, Inc. ('Moody's') or, if not rated by
S&P or Moody's, are determined by the
</TABLE>

4
<PAGE>

Series' sub-adviser, Mitchell Hutchins
Institutional Investors Inc. ('MHII'), to be
of comparable quality; repurchase agreements
with respect to securities in which the Series
may invest; and instruments used in certain
hedging and related income strategies. When
unusual circumstances warrant and shortly
prior to its Termination Date, the Series may
hold up to all of its assets in cash and
high-quality money market instruments.

'Investment Objective and Policies,' 'Special
Considerations and Risk Factors,' 'Dividends
and Other Distributions; Reverse Splits' and
'Taxation.'

Investment Adviser and
Sub-Adviser................... Mitchell Hutchins is a wholly owned subsidiary
of PaineWebber, which is a wholly owned
subsidiary of Paine Webber Group Inc., a
publicly held financial services holding
company. As investment adviser and
administrator for the Series, Mitchell
Hutchins supervises all matters relating to
the operation of the Series, including the
management of the Series' portfolio by the
Series' sub-adviser. MHII is a wholly owned
subsidiary of Mitchell Hutchins. As the
sub-adviser for the Series, MHII makes
investment decisions and places orders to buy,
sell or hold particular securities. See
'Management of the Series.'

Dividends and Other
Distributions; Reverse
Splits........................ The Series normally pays monthly Cash
Dividends from its net investment income and
distributes any net investment income in
excess of its Target Return and any realized
capital gains through annual Reinvestment
Dividends that are paid in additional Shares
of the Series unless a shareholder elects to
receive them in cash. Shareholders that elect
to receive Reinvestment Dividends in cash will
not be Reinvesting Shareholders. Because the
investment objective of the Series is directed
toward achieving the Target Return for, and
returning $10.00 per Targeted Share to,
Reinvesting Shareholders, the Series'
management strongly recommends that all
investors receive Reinvestment Dividends in
additional Shares. Non-Reinvesting
Shareholders may not achieve, and should not
expect, the same investment results as
Reinvesting Shareholders.

Cash Dividends are declared monthly and paid
on or about the last business day of each
month. Reinvestment Dividends, if any, are
declared annually in December of each year and
are paid shortly thereafter. The Series will
declare and make its Termination Distribution
on or about its Termination Date.

Due to tax considerations, the monthly Cash

Dividend otherwise payable in January for the
Series normally is paid in two installments,
each of which is in the amount of
approximately one-half of one month's dividend
at a rate equal to the Series' Target Return.
The first
</TABLE>

5
<PAGE>

<TABLE>
<S> <C>
installment is paid at the end of December,
with a record date in mid-December. The second
installment is paid on the usual schedule of
the regular January dividend. Persons who
become shareholders of record after the
mid-December record date, but before the
record date of the January dividend, receive
the reduced January dividend, but do not
receive the first installment.

The Board currently intends to declare, at the
time of the declaration of any Reinvestment
Dividend, a reverse split of the Series'
Shares that will cause the number of Shares
held by Reinvesting Shareholders to remain the
same as before the Reinvestment Dividend,
while reducing the number of Shares held by
shareholders who receive such dividends in
cash ('Reverse Split'). For example, if the
Series declares a Reinvestment Dividend of
$0.10 per Share, and if at the time that such
dividend is paid the Series has a net asset
value of $10.00 per Share, a Reinvesting
Shareholder holding one Share of the Series
would receive .01 additional Shares. At the
same time, a 1.01-for-1 Reverse Split would be
declared, with the result that the Reinvesting
Shareholder's holdings would be consolidated
back into one Share. The new Share held by
that Reinvesting Shareholder would have the
same net asset value as the Share held
immediately prior to the payment of the
Reinvestment Dividend. In the case of a
shareholder holding one Share of the Series
who elects to receive the same Reinvestment
Dividend in cash, the number of Shares held by
the shareholder would not increase by reason
of the Reinvestment Dividend and would be
reduced by the Reverse Split to approximately

0.99 Shares. The aggregate net asset value of
the Shares held by such a non-Reinvesting
Shareholder would have been reduced by an
amount equal to the cash amount paid to such
non-Reinvesting Shareholder as a Reinvestment
Dividend.

A Reverse Split of the Series' Shares normally
will result in non-Reinvesting Shareholders
holding odd-lots and fractional Shares of the
Series. Since it is not anticipated that there
will be any secondary market for fractional
Shares, such non-Reinvesting Shareholders'
investments in the Series would become
illiquid to the extent fractional Shares are
held. See 'Dividends and Other Distributions;
Reverse Splits' and 'Taxation.'

Special Considerations and Risk
Factors....................... The principal means by which the Series seeks
to achieve its investment objective is the
management of the composition and duration of
its investment portfolio. The duration of a
fixed income security is the weighted average
term to maturity of the present value of the
cash flows (including payments of interest and
repayments of principal) of that security.
MHII believes that, by managing the duration
of the Series' portfolio, it can balance
changes in interest rates against changes in
the net asset value of the Series in order to
attempt to manage the interest rate
sensitivity of the portfolio and attempt to
achieve the Series' Target Return.
</TABLE>

6
<PAGE>

securities that might pay higher rates of
return to the Series or attempt to realize
capital gains that might be available to the
Series due to changes in market interest rates
if doing so would adversely affect the
duration of the Series. While this duration
management strategy might result in the Series
forgoing higher yields or capital gains that
might become available, MHII believes that
such duration management will enable it to
minimize the exposure of the Series' portfolio
from interest rate risk and thereby help to
achieve the Series' investment objective.

If market interest rates increase during the
life of the Series, a portion of the Series'
total return is likely to be realized in the
form of net investment income that is in
excess of the Series' Target Return. MHII
anticipates that excess net investment income
resulting from such market rate increases
generally will be accompanied by a reduction
in the net asset value of the Series'
investment portfolio. If the Series was not
able to retain and reinvest such excess
investment income, the amount available for
the Termination Distribution would be likely
to be less than $10.00 per Targeted Share.
Similarly, if interest rates decrease during
the life of the Series, a portion of the
Series' total return is likely to be realized
in the form of capital gains, while the yield
available on newly acquired investment
securities generally will be lower. If the
Series was not able to retain and reinvest
such capital gains, the aggregate amount of
net investment income available for cash
dividends would be likely to be less than its
Target Return, and the amount available for
the Series' Termination Distribution would be
likely to be less than $10.00 per Targeted
Share. To the extent that the duration of the
Series' portfolio is shorter than the period
remaining until its Termination Date, the
Series' investment income could be reduced
without the Series realizing corresponding
capital gains. No assurance can be given that
the Series will achieve its investment
objective.

To date, the net investment income of the
Series has not been sufficient to pay monthly
dividends at either its original or its lower,
revised Target Return rate and still cover all

operating expenses, including the investment
advisory and administration fees payable to
Mitchell Hutchins. The Series' current net
asset values is less than $10.00 per Targeted
Share, and there is no assurance that
portfolio gains or undistributed income for
the Series will be sufficient to recoup that
differential. Mitchell Hutchins intends to
continue to waive all or a portion of its fees
and/or reimburse the Series' operating
expenses to the
</TABLE>

7
<PAGE>

<TABLE>
<S> <C>
extent necessary to assist the Series to make
a Termination Distribution of $10.00 per
Targeted Share, although it is under no
obligation to do so.

The Reverse Split that is expected to be
declared with respect to the Series' Shares
following any Reinvestment Dividend will
result in Reinvesting Shareholders continuing
to hold the same number of Shares as they held
immediately before such Reinvestment Dividend.
This is intended to enable Reinvesting
Shareholders to continue to receive Cash
Dividends equal to the Target Return and to
receive a Termination Distribution of $10.00
per Targeted Share. For shareholders who
choose to receive Reinvestment Dividends in
cash, however, each Reverse Split will result
in their holding a reduced number of Shares.
Therefore, while such shareholders will
receive the same per Share Cash Dividends and
per Share Termination Distribution as
Reinvesting Shareholders, the aggregate amount
of Cash Dividends received by non-Reinvesting
Shareholders is expected to be less than the
Target Return on the number of Shares they
originally purchased, and the aggregate
Termination Distribution received by such
shareholders is expected to be less than
$10.00 for each such Share.

The value of the securities held by the
Series, and thus the net asset value of the
Series' Shares, generally fluctuates with
changes in prevailing interest rates and

perceived creditworthiness of the issuers of
such securities. The extent of such
fluctuation also depends on various other
factors, such as the average maturity of the
Series' investments and the extent to which
the Series hedges its interest rate risks. The
Series intends to manage the duration of its
portfolio to correspond with the period
remaining until its Termination Date, adjusted
for the cash distributions expected to be made
to shareholders and the payments on any
borrowings by the Series. Consequently, the
extent of the fluctuations in the net asset
value of the Series' Shares due to changes in
prevailing interest rates can be expected to
diminish as the period until the Series'
Termination Date becomes shorter.

Although the Series has no present intention
to do so, it is authorized to borrow up to an
amount equal to approximately 33 1/3% of its
total assets (including the amount borrowed).
Any such borrowings would create leverage, a
speculative factor. The Shares may involve a
high degree of risk because the Series may
leverage more than 10% of its total assets.

Certain of the investments and techniques that
the Series may employ would expose it to
certain unique risks. These investments and
techniques include purchasing and selling
illiquid securities, zero coupon securities,
mortgage-backed and asset-backed securities
and when-issued securities, entering into
repurchase agreements, lending portfolio
securities and participating in the options
and futures markets and in interest rate
swaps, caps, collars and floors.

8
<PAGE>

<TABLE>
<S> <C>
time when the Shares are trading at a discount

to net asset value could incur a loss of
capital even if the net asset value of the
Series has not declined since the shareholder
purchased his Shares. This market risk is
separate and distinct from the risk that the
Series' net asset value will decrease.

Investors should recognize that the Series is
designed primarily for Reinvesting
Shareholders and not as a trading vehicle.
Fractional shares are not traded on the Amex,
and PaineWebber does not intend to make a
market in fractional Shares of the Series. It
is not anticipated that a market for such
fractional Shares will develop. Therefore,
fractional Shares that may be held by
shareholders who elect to receive Reinvestment
Dividends in cash should be considered
illiquid.

The Articles of Incorporation for the Series
contain provisions that have the effect of
limiting (1) the ability of other entities or
persons to acquire or control the Series, (2)
the Series' freedom to engage in certain
transactions and (3) the ability of the
Series' directors or shareholders to amend the
Articles of Incorporation. These provisions of
the Articles of Incorporation may be regarded
as 'anti-takeover' provisions.

For further information regarding special
considerations and risks relating to the
Series, see 'Investment Objective and
Policies,' 'Special Considerations and Risk
Factors,' 'Taxation,' 'Description of the
Shares Certain Anti-Takeover Provisions of the
Articles of Incorporation' and Appendix A.
Investment Advisory and
Administration Fee............ The Series is obligated to pay Mitchell
Hutchins, as investment adviser and
administrator, a fee, computed weekly and
payable monthly, in an amount equal to the
annual rate of 1.00% of the Series' average
weekly net assets. Such administration and
advisory fee rates are higher than those paid
by most other investment companies. Mitchell
Hutchins (not the Series) is obligated to pay
MHII a fee, computed weekly and payable
monthly, in an amount equal to the annual rate
of up to a maximum of 0.325% of the Series'
average weekly net assets. See 'Management of
the Series.'
Custodian, Transfer Agent,

Dividend Disbursing Agent and
Registrar..................... State Street Bank and Trust Company serves as
custodian of the Series' assets. PNC Bank,
National Association serves as transfer and
dividend disbursing agent and registrar of the
Series. See 'Custodian, Transfer and Dividend
Disbursing Agent and Registrar.'
</TABLE>

<PAGE>
FINANCIAL HIGHLIGHTS

The table below provides selected per share data and ratios for one Share
of the Series for the periods shown. This information is supplemented by the
financial statements for such periods, and the accompanying notes, appearing in
this Prospectus. See 'Financial Statements.' The financial statements and notes,
as well as the information in the table appearing below, have been audited by
Ernst & Young LLP, independent auditors, whose report thereon is also included
in this Prospectus.

<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
ENDED JUNE 30,
--------------------------------
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
Net asset value, beginning of period....................................... $ 9.44 $ 10.31 $ 10.35
--------- --------- --------
Net investment income...................................................... 0.72 0.60 0.62
Net realized and unrealized gains (losses) from investment and
futures transactions..................................................... 0.03 (0.81) 0.09
--------- --------- --------
Net increase (decrease) in net asset value from operations................. 0.75 (0.21) 0.71
--------- --------- --------
Less dividends and distributions:
Dividends from net investment income....................................... (0.62) (0.62) (0.59)
Distributions from net realized gains ..................................... -- -- (0.16)
In excess of net investment income......................................... -- (0.04) --
--------- --------- --------
Total dividends and distributions.......................................... (0.62) (0.66) (0.75)
--------- --------- --------
Payment from adviser....................................................... 0.06 -- --
--------- --------- --------
Net asset value, end of period............................................. $ 9.63 $ 9.44 $ 10.31
--------- --------- --------
--------- --------- --------
Per Share market value, end of period...................................... $ 9.25 $ 9.25 $ 10.25
--------- --------- --------
--------- --------- --------
Total investment return(1)................................................. 7.24% (3.38)% 8.37%
--------- --------- --------
--------- --------- --------
Ratios and supplemental data:
Net assets, end of period (000's omitted).................................. $ 40,866 $ 39,556 $ 42,907
Ratio of expenses to average net assets(2)................................. 0.00% 0.00% 1.49%
Ratio of net investment income to average net assets(2).................... 7.76% 6.15% 6.22%
Portfolio turnover rate.................................................... 223.49% 298.05% 93.23%
</TABLE>

------------------

Note: Per share information for the periods above including total investment
return, reflects the impact of the reverse stock splits and the stock
split. The reverse stock splits on December 27, 1994, December 28, 1993
and December 30, 1992 had the effect of increasing the net asset value per
share on July 1, 1992 by $0.12, $0.08 and $0.15, respectively.

(1) Total investment return is calculated assuming a purchase of one share of
common stock at market value on the first day of each period reported,
reinvestment of all dividends and capital gain distributions, and a sale at
market value on the last day of each period reported. Although the Series
does not offer dividend reinvestment for monthly dividends, total investment
return is calculated by assuming reinvestment of all dividends and capital
gain distributions in accordance with regulatory requirements. Total
investment return does not reflect brokerage commissions.

(2) During each of the periods presented, Mitchell Hutchins reimbursed the
Series for all or a portion of its operating expenses and waived all or a
portion of its advisory and administration fees. If such waivers and
reimbursements had not been made, the ratios of expenses to average net
assets and net investment income to average net assets would have been 1.45%
and 6.31%, 1.46% and 4.69% and 1.50% and 6.21%, respectively, for the years
ended June 30, 1995, 1994 and 1993.

10
<PAGE>
THE SERIES

The Series is a diversified, closed-end management investment company and
has registered as such under the Investment Company Act of 1940 ('1940 Act').
The Series was incorporated under the laws of the State of Maryland on May 1,
1992. In July 1992, the Series completed an initial public offering of 42,357
Shares. The Series effected a 100-for-1 stock split on June 24, 1993. The Series
has a limited term of existence and will cease to exist (except for the purpose
of winding up its affairs), automatically and without the need for any action by
its shareholders, on its Termination Date, June 29, 1997. The principal office
of the Series is located at 1285 Avenue of the Americas, New York, New York
10019, and its telephone number is (212) 713-2000.

INVESTMENT ADVISERS

Mitchell Hutchins is investment adviser and administrator for the Series.
Its principal business address is 1285 Avenue of the Americas, New York, New
York 10019. Mitchell Hutchins is a wholly owned subsidiary of PaineWebber, which
is a wholly owned subsidiary of Paine Webber Group Inc., a publicly held
financial services holding company. Mitchell Hutchins provides investment
advisory and portfolio management services to investment companies, pension

funds and other institutional, corporate and individual clients. As of July 31,
1995, total assets under Mitchell Hutchins's management exceeded $44.7 billion.
As of that date, Mitchell Hutchins served as investment adviser or sub-adviser
to 41 registered investment companies with 87 investment portfolios having
aggregate assets of over $28.9 billion.

MHII is a wholly owned subsidiary of Mitchell Hutchins. The principal
business address of MHII is 1285 Avenue of the Americas, New York, New York
10019. As the sub-adviser for the Series, MHII makes investment decisions and
places orders to buy, sell or hold particular securities for the Series. MHII
provides investment management services to institutional and corporate clients.
As of July 31, 1995, total assets under MHII's management were approximately
$10.3 billion. See 'Management of the Series.'

THE OFFERING

The Series' Shares may be offered pursuant to this Prospectus from time to
time in order to effect OTC secondary market sales by PaineWebber in its
capacity as a dealer and secondary market-maker at negotiated prices related to
prevailing market prices on the Amex at the time of sale. PaineWebber intends
(but is not obligated) to continue to make such a secondary market. The Shares
are listed and traded on the Amex under the symbol 'TGB.' PaineWebber's
principal business address is 1285 Avenue of the Americas, New York, New York
10019.

PaineWebber does not intend to make a market in fractional Shares of the
Series, and fractional shares cannot be traded on the Amex. It is not
anticipated that a market for such fractional Shares will develop. Therefore,
fractional Shares that may be held by shareholders who elect to receive
Reinvestment Dividends in cash should be considered illiquid.

USE OF PROCEEDS

The Series will not receive any proceeds from the sale of any Shares
offered pursuant to this Prospectus. Proceeds received by PaineWebber as a
result of its secondary market sales of the Shares will be utilized by
PaineWebber in connection with its secondary market operations and for general
corporate purposes.

11
<PAGE>
TRADING HISTORY

The Shares are listed and traded on the Amex under the symbol 'TGB,' and

PaineWebber makes an OTC secondary market in whole Shares of the Series. Prior
to June 25, 1993, secondary market trading in the Series' Shares was available
through an OTC secondary market maintained by PaineWebber. The following tables
set forth for the Shares of the Series, for each fiscal quarter since the
commencement of secondary market trading in the Shares: (a) the per Share high
and low sales prices as reported during the periods indicated by PaineWebber
through June 17, 1993, and thereafter as reported by Amex for the consolidated
market; (b) the per Share net asset values, based on the Series' computation as
of 4:00 p.m. on the second to last business day for the week corresponding to
the dates on which the respective high and low sales prices were recorded; and
(c) the discount or premium to net asset value represented by the high and low
sales prices shown. THE RANGE OF NET ASSET VALUES AND OF PREMIUMS AND DISCOUNTS
FOR THE SHARES DURING THE PERIODS SHOWN MAY BE BROADER THAN IS SHOWN IN THESE
TABLES. On August 11, 1995, the closing price per Share on the Amex was $9.50;
the net asset value per Share was $9.60; and the discount or premium to net
asset value per Share was (1.0)%.

<TABLE>
<CAPTION>
(DISCOUNT) OR
SALES NET ASSET PREMIUM TO NET
PRICES(1) VALUES(1) ASSET VALUE
-------------- -------------- ---------------
PERIOD ENDED HIGH LOW HIGH LOW HIGH LOW
- ------------------------- ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
9/30/93................. $10.38 $10.13 $10.06 $ 9.99 $ 3.18 $ 1.40
12/31/93................. 10.50 9.88 9.78 9.77 7.36 1.13
3/31/94................. 10.25 8.88 9.84 9.80 4.17 (9.39)
6/30/94................. 9.50 8.88 9.38 9.45 1.26 (6.03)
9/30/94................. 9.25 8.75 9.34 9.29 (0.96) (5.81)
12/31/94................. 9.00 8.50 9.29 9.22 (3.12) (7.81)
3/31/95................. 9.13 8.25 9.41 9.20 (3.03) (10.33)
6/30/95................. 9.38 8.75 9.59 9.54 (2.24) (8.28)
9/30/95................. -- -- -- -- -- --
</TABLE>

- ------------------

(1) Per Share information reflects the impact of Reverse Splits on December 30,
1992, December 28, 1993 and December 27, 1994 and the 100-for-1 stock
split on June 24, 1993.

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Series is to manage a portfolio of U.S.
government securities and AAA-rated and comparable debt obligations in order to

return to Reinvesting Shareholders, on the Series' Termination Date, $10.00 for
each Targeted Share, while providing high monthly income in comparison to CDs
having maturities no longer than the term of the Series and in comparison to
money market funds. No assurance can be given that the Series will be able to
achieve its investment objective. Shares of the Series are not insured or
guaranteed by the U.S. government or any other entity.

During 1994, the Series' Target Return was lowered to 5.0% (calculated as a
per annum rate of return on $10.00 per Share) from 6.5%. This reduction
reflected the judgment of the Board of the Series that a lower rate for the
Series' regular monthly cash dividends ('Cash Dividends') was consistent with
the Series' goal of returning $10.00 per Share to Reinvesting Shareholders on
the Series' Termination Date. However, there can be no assurance that the income
being generated by the portfolio or the present Target Return will be
maintained, and the Board may determine that a futher reduction of the Series'
Target Return is necessary or appropriate.

12
<PAGE>

The Series intends to distribute any net investment income in excess of its
Target Return and any capital gains--including both net short-term capital gain
(the excess of short-term capital gains over short-term capital losses) and net
capital gain (the excess of net long-term gain over net short-term capital
loss)--realized by the Series through annual Reinvestment Dividends that will be
paid in additional Shares of the Series unless a shareholder elects to receive
them in cash. As used herein, a Reinvesting Shareholder in the Series is an
investor who: (1) reinvests all Reinvestment Dividends on Targeted Shares in
additional Series Shares; and (2) retains all such Shares until the Series'
Termination Date. Because the investment objective of the Series is directed
toward achieving the Target Return for Reinvesting Shareholders, other investors
will not necessarily achieve, and should not expect, similar investment results.
If the Series achieves its investment objective and if, as currently
anticipated, Reverse Splits are declared in connection with the Series'
Reinvestment Dividends, the Series would return $10.00 per Share to all
shareholders for all Shares that they hold as of the Series' Termination Date.
However, non-Reinvesting Shareholders would hold a smaller number of shares on
the Termination Date than they originally purchased.

The Series normally invests its assets exclusively in: U.S. government
securities, which include U.S. Treasury obligations and mortgage-backed and
other securities issued or guaranteed by U.S. government agencies or
instrumentalities; U.S. dollar-denominated debt obligations issued by U.S. or
foreign private issuers or by supra-national entities (such as the World Bank)
that at the time of purchase are rated at least AAA by S&P or Aaa by Moody's or,
if not rated by S&P or Moody's, are determined by MHII to be of comparable
quality; in repurchase agreements with respect to securities in which the Series
may invest; and instruments used in certain hedging and related income
strategies. S&P and Moody's are private services that provide ratings of the

credit quality of debt obligations. It should be emphasized that ratings are
general and are not absolute standards of quality. Consequently, debt
obligations with the same maturity, interest rate and rating may have different
market prices. Subsequent to its purchase by the Series, an issue of debt
obligations may cease to be rated or its rating may be reduced to below AAA or
Aaa. MHII will consider such an event in determining whether the Series should
continue to hold the obligation. See Appendix B for further information
regarding S&P and Moody's ratings.

As a matter of fundamental policy, the Series normally concentrates at
least 25% of its total assets in mortgage-backed and asset-backed securities
issued or guaranteed by private issuers or by agencies or instrumentalities of
the U.S. government. Investments in such securities involve special risks. See
'Special Considerations and Risk Factors--Special Characteristics of
Mortgage-Backed and Asset-Backed Securities.' The Series' policy of so
concentrating its investments in mortgage- and asset-backed securities has the
effect of increasing the Series' exposure to those risks and might cause the
value of its portfolio securities to fluctuate more than otherwise would be the
case. This concentration policy may not be changed without the approval of the
Series' shareholders.

The value of the securities held by the Series, and thus the net asset
value of the Series' Shares, generally varies with changes in prevailing
interest rates and perceived creditworthiness of the issuers of such securities.
Thus, if interest rates have increased from the time a debt security was
purchased by the Series, such security, if sold, normally would be sold at a
price less than its cost. Conversely, if interest rates have declined from the
time that a security was purchased, such security, if sold, normally would be
sold at a price greater than its cost. The extent of the variations in the net
asset value of the Series also depends on various other factors, such as the
average maturity of the Series' investments and the extent to which the Series
hedges its interest rate risks. While the Series may invest in securities that
have stated maturities ranging from overnight to 40 years, MHII intends to
manage the duration of the Series' portfolio to correspond with, or be shorter
than, the period remaining until the Series' Termination Date, adjusted for the
cash distributions expected to be made to shareholders and the payments on any
borrowings by the Series. Consequently, the extent of the

13
<PAGE>
fluctuations in the net asset value of the Series' Shares due to changes in
prevailing interest rates can be expected to diminish as the period until the
Series' Termination Date becomes shorter.

The Series is designed for investors who seek to recover their investments
at the end of a specified term while receiving a higher yield than may be
available on CDs having maturities no longer than the term of the Series or on
money market funds. In connection with the distribution of, or any secondary

market for, Series Shares, the Series or PaineWebber may refer to averages of
yields of CDs of major banks published by Banxquote(Registered) Money Markets.
Shares are intended as investments for investors who are willing and able to
retain their Shares until the Series' Termination Date and not as a short-term
investment. Series Shares are not CDs. Unlike CDs, which are insured by the
Federal Deposit Insurance Corporation for up to $100,000 per depositor per
institution, Series Shares are not insured by an agency of the U.S. government,
and unlike money market funds, the net asset value of Series Shares will
fluctuate. Unlike CDs, there is no assurance that the Series will achieve its
investment objective, including the return of $10.00 per Targeted Share on or
about the Termination Date, or that the Series will be able to pay the Target
Return to Reinvesting Shareholders.

As described elsewhere in this Prospectus, the Shares are traded on the
Amex. See 'The Offering.' Shares of money market funds are redeemable at any
time at the fund's $1.00 net asset value per share, while CDs are typically
subject to substantial penalties for early withdrawals. The Series pays monthly
cash dividends, as do most money market funds. Most CDs pay interest income at
annual, semi-annual or quarterly intervals.

Unlike investors in most CDs, Series shareholders who receive Reinvestment
Dividends in additional Series Shares in any year will have taxable income from
their investments in the Series that generally will exceed the cash that they
receive from the Series in that year. If the Series achieves its investment
objective, a portion of the $10.00 per Share received by Reinvesting
Shareholders will represent amounts that previously were paid as dividends and
capital gain distributions and that were reinvested in additional Shares rather
than a return of originally invested capital. Consequently, at the time of the
Series' Termination Distribution, the Series shareholders may have a tax basis
for their Series Shares that is higher than the cash amount of their Termination
Distribution, in which event they generally would be treated for federal income
tax purposes as having realized a long-term capital loss. See 'Special
Considerations and Risk Factors,' 'Dividends and Other Distributions; Reverse
Splits,' 'Distribution of Shares, Secondary Market and Fractional Share
Repurchases' and 'Taxation.'

U.S. GOVERNMENT SECURITIES. The U.S. government securities in which the
Series is authorized to invest include direct obligations of the U.S. Treasury
(such as Treasury bills, notes and bonds) and obligations issued by U.S.
government agencies and instrumentalities, including securities that are
supported by the full faith and credit of the United States, securities that are
supported primarily or solely by the creditworthiness of the issuer (such as
securities of the Federal Home Loan Banks, the Student Loan Marketing
Association, the Resolution Funding Corporation and the Tennessee Valley
Authority) and securities that are supported primarily or solely by specific
pools of assets and the creditworthiness of a U.S. government-related issuer
(such as government sponsored mortgage-backed securities). U.S. government
agency and instrumentality securities (including those related to mortgage or

other asset pools) that are not explicitly supported by the full faith and
credit of the United States are generally perceived in the securities market as
being implicitly supported by such full faith and credit. As a consequence,
these securities generally bear only slightly higher market yields than do
securities that have explicit full faith and credit support. Market prices for
securities of agencies and instrumentalities that do not have explicit full
faith and credit support often differ based upon supply and demand, specific
security characteristics and other market factors, but such price differentials
generally are not attributable to perceived differences in the credit risk of
such agencies or instrumentalities.

14
<PAGE>
Similarly, the identity of the government-related issuer or guarantor generally
does not result in material differences in the liquidity of such securities.

The Series also may invest up to 10% of its assets in certain zero coupon
securities that are U.S. Treasury notes and bonds that have been stripped of
their unmatured interest coupon receipts or interests in such U.S. Treasury
securities or coupons, including Certificates of Accrual Treasury Securities
('CATS') and Treasury Income Growth Receipts ('TIGRs'). The staff of the SEC
currently takes the position that 'stripped' U.S. government securities that are
not issued through the U.S. Treasury STRIPs program are not U.S. government
securities.

MORTGAGE-BACKED SECURITIES. The U.S. government and privately issued
securities in which the Series is authorized to invest include mortgage-backed
securities. Mortgage-backed securities represent direct or indirect
participations in, or are secured by and payable from, mortgage loans secured by
real property. Mortgage-backed securities include collateralized mortgage
obligations ('CMOs') and may be: (1) issued or guaranteed by U.S. government
agencies or instrumentalities, such as the Government National Mortgage
Association ('GNMA'), the Federal National Mortgage Association ('FNMA') or the
Federal Home Loan Mortgage Corporation ('FHLMC'); (2) issued by private issuers
(generally originators of and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers and special
purpose subsidiaries of the foregoing (collectively, 'Private Mortgage
Lenders')) but collateralized by pools of mortgage loans or other
mortgage-backed securities that are guaranteed, directly or indirectly, by the
U.S. government or one of its agencies or instrumentalities; or (3) issued by
Private Mortgage Lenders without any government guarantee of the underlying
mortgage assets, but usually with some form of private credit enhancement.

Collateralized Mortgage Obligations. CMOs are debt obligations that are
collateralized either by mortgage loans or mortgage-pass through securities
(such collateral collectively being called 'Mortgage Assets'). Multi-class
mortgage pass-through securities are interests in trusts that are comprised of
Mortgage Assets and that have multiple classes similar to those in CMOs. Unless
the context indicates otherwise, references herein to CMOs include multi-class

mortgage pass-through securities. Payments of principal and interest on the
Mortgage Assets (and, in the case of CMOs, any reinvestment income thereon)
provide the funds to pay debt service on the CMOs or to make scheduled
distributions on the multi-class mortgage pass-through securities.

In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMO, also referred to as a 'tranche,' is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of a CMO (other than any
'principal-only' class) on a monthly, quarterly or semiannual basis. The
principal and interest on the Mortgage Assets may be allocated among the several
classes of a CMO in many ways. Sequential pay CMOs are structured so that
payments of principal, including any principal prepayments, on the Mortgage
Assets are applied to the classes of a CMO in the order of their respective
stated maturities or final distribution dates so that no payment of principal
will be made on any class of the CMO until all other classes having an earlier
stated maturity or final distribution date have been paid in full. In some CMO
structures, all or a portion of the interest attributable to one or more of the
CMO classes may be added to the principal amounts attributable to such classes,
rather than passed through to certificateholders on a current basis, until other
classes of the CMO are paid in full.

Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity

15
<PAGE>
date or final distribution date but may be retired earlier. Planned Amortization
Classes ('PAC Bonds') are a form of parallel pay CMO which, as indicated above,
generally require payments of a specified amount of principal on each payment
date, together with interest due.

Stripped Mortgage-Backed Securities. Stripped mortgage-backed securities
('SMBSs') are classes of mortgage-backed securities that receive different
proportions of the interest and principal distributions from the underlying pool
of Mortgage Assets. SMBSs may be issued by agencies or instrumentalities of the
U.S. government or by Private Mortgage Lenders. A common type of SMBS will have
one class that receives some of the interest and most of the principal from the
Mortgage Assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or 'IO' class), while the other class will
receive all of the principal (the principal-only or 'PO' class). The yields to
maturity on both IO and PO classes are extremely sensitive to the rate of
principal payments (including prepayments) on the related underlying Mortgage
Assets. If the underlying Mortgage Assets of an IO class of an SMBS experience
greater than anticipated prepayments of principal, an investor may fail to
recoup fully its initial investment in these securities even if the securities
are rated in the highest rating category.

Although SMBSs are purchased and sold by institutional investors through
several investment bankers acting as brokers or dealers, trading markets for
SMBSs are somewhat illiquid. Even when prices are available, such prices may not
reflect all known facts concerning such instruments. In addition, SMBSs will
experience greater volatility than mortgage-related securities in general.

GNMA Certificates. GNMA Certificates represent ownership interests in
individual pools of residential mortgage loans. These securities are designed to
provide monthly payments of interest and principal to the investor. Timely
payment of interest and principal is backed by the full faith and credit of the
United States. Each mortgagor's monthly payments to his lending institution on
his residential mortgage are 'passed through' to certificateholders such as the
Series. Mortgage pools consist of whole mortgage loans or participations in
loans. The terms and characteristics of the mortgage instruments are generally
uniform within a pool but may vary among pools. Lending institutions that
originate mortgages for the pools are subject to certain standards, including
credit and underwriting criteria for individual mortgages included in the pools.
GNMA also issues CMOs.

FNMA Securities. FNMA maintains a national secondary market in residential
mortgage loans insured by U.S. government agencies and in privately insured or
uninsured residential mortgage loans (sometimes referred to as 'conventional
mortgage loans' or 'conventional loans'). FNMA issues guaranteed mortgage
pass-through certificates ('FNMA certificates'), which resemble GNMA
certificates in that each FNMA certificate represents a pro rata share of all
interest and principal payments made and owed on the underlying pool. FNMA
guarantees timely payment of interest and principal on FNMA certificates. The
FNMA guarantee is not backed by the full faith and credit of the United States.
FNMA also issues CMOs.

FHLMC Securities FHLMC also maintains a national secondary market for U.S.
government-insured and conventional residential mortgage loans. FHLMC issues two
types of mortgage pass-through securities: mortgage participation certificates
('PCs') and guaranteed mortgage certificates ('GMCs'). PCs resemble GNMA
certificates in that each PC represents a pro rata share of all interest and
principal payments made and owed on the underlying pool. FHLMC generally
guarantees timely monthly payment of interest on PCs and the ultimate payment of
principal, but it also has a PC program under which it guarantees timely payment
of both principal and interest. GMCs also represent a pro rata interest in a
pool of mortgages. These instruments, however, pay interest semi-annually and
return principal once a year in guaranteed minimum payments. The FHLMC guarantee
is not backed by the full faith and credit of the United States. FHLMC also
issues CMOs.

16
<PAGE>

ASSET-BACKED SECURITIES. The Series may also invest in asset-backed
securities, which have structural characteristics similar to mortgage-backed
securities but relate to assets that are not mortgage loans or interests in
mortgage loans.

Asset-backed securities represent participations in, or are secured by and
payable from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property and receivables
from revolving credit (credit card) agreements. Such assets are securitized
through the use of trusts and special purpose corporations. Payments or
distributions of principal and interest may be guaranteed up to certain amounts
and for a certain time period by a letter of credit or a pool insurance policy
issued by a financial institution unaffiliated with the trust or corporation.
Because asset-backed securities are relatively new, the market experience in
these securities is limited, and the market's ability to sustain liquidity
through all phases of the market cycle has not been tested.

Asset-backed securities present certain risks that are not presented by
mortgage-backed securities or other securities in which the Series may invest.
Primarily, these securities do not have the benefit of a security interest in
collateral that is comparable to Mortgage Assets. Credit card receivables are
generally unsecured, and the debtors on such receivables are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set-off certain amounts owed on the credit cards,
thereby reducing the balance due. Automobile receivables generally are secured,
but by automobiles rather than residential real property. Most issuers of
automobile receivables permit the loan servicers to retain possession of the
underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the asset-backed securities. In addition,
because of the large number of vehicles involved in a typical issuance and
technical requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in the underlying
automobiles. Therefore, there is the possibility that, in some cases, recoveries
on repossessed collateral may not be available to support payments on these
securities.

ZERO COUPON SECURITIES. The Series may invest up to 10% of its assets in
'zero coupon' U.S. Treasury and privately issued U.S. and foreign debt
securities, which are bills, notes and bonds (including PO classes of SMBSs or
of asset-backed securities) that have been stripped of their unmatured interest
coupons and receipts or certificates representing interests in such stripped
debt obligations and coupons. A zero coupon security pays no interest to its
holder prior to maturity. Accordingly, such securities usually trade at a deep
discount from their face or par value and will be subject to greater
fluctuations in market value in response to changing interest rates than debt
obligations of comparable maturities that make current distributions of
interest. While zero coupon securities will not contribute to the cash available
to the Series for purposes of paying its Target Return, MHII believes that such
securities may facilitate the Series' ability to manage the duration of its
portfolio and to return $10.00 per Share to investors on its Termination Date.
Federal tax law requires that a holder of a zero coupon security include a
portion of the discount with which the security was issued in its gross income
each year, even though the holder receives no interest payment on the security
during the year. For additional discussion of the tax treatment of zero coupon
securities, see 'Taxation.'

HEDGING AND RELATED INCOME STRATEGIES. The Series may use options (both
exchange-traded and OTC) to attempt to enhance income and also may attempt to
reduce the overall risk of its investments (hedge) by using options, futures
contracts and interest rate protection contracts. Hedging strategies may be used
in an attempt to manage the Series' average duration and other risks of the
Series' investments, which can affect fluctuations in the Series' net asset
value. The Series' ability to use these strategies may be limited by market
conditions, regulatory limits and tax considerations. Appendix A contains
further information on these strategies.

The Series may purchase and sell call and put options on bond indices and
securities in which the Series is authorized to invest for hedging purposes or
to enhance income. The Series also may purchase and sell

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interest rate futures contracts and options thereon for hedging purposes. In
addition, the Series may purchase and sell covered straddles on securities or
bond indices or options on futures contracts on securities. The Series may enter
into interest rate swaps, caps, collars and floors. The Series will purchase a
put or call option, including any straddles or spreads, only if the value of the
premium paid by the Series thereon, when aggregated with the premiums on all
other options held by the Series, does not exceed 5% of the Series' total
assets. Similarly, the Series will not purchase or sell futures contracts or
related options if, immediately thereafter, the sum of the amount of initial
margin deposits on the Series' existing futures positions and initial margin
deposits and premiums paid for related options would exceed 5% of the Series'
total assets. These limits do not limit the percentage of assets that are at
risk under purchased options or under futures contracts to 5% of the Series'
assets. The Series will not write any put option or enter into any futures
contract if the amount of the Series' obligation under such contract (net of the
obligations of its contraparty) when aggregated with the amount of the Series'
obligations under all of the outstanding put options that it has written and the
amount of the Series' net obligations under all of its outstanding futures
contracts exceeds 25% of the Series' total assets. The amount of call options
that may be written by the Series is not limited.

The Series might not employ any of the strategies described above, and
there can be no assurance that any strategy used will succeed. The use of these
strategies involves certain special risks, including (1) the fact that skills
needed to use hedging instruments are different from those needed to select the
Series' securities, (2) possible imperfect correlation, or even no correlation,
between price movements of hedging instruments and price movements of the
investments being hedged, (3) the fact that, while hedging strategies can reduce
the risk of loss, they can also reduce the opportunity for gain, or even result
in losses, by offsetting favorable price movements in hedged investments and (4)
the possible inability of the Series to purchase or sell a portfolio security at
a time that otherwise would be favorable for it to do so, or the possible need

for the Series to sell a portfolio security at a disadvantageous time, due to
the need for the Series to maintain 'cover' or to segregate securities in
connection with hedging transactions and the possible inability of the Series to
close out or to liquidate its hedged position.

New financial products and risk management techniques continue to be
developed. The Series may use these instruments and techniques to the extent
consistent with its investment objective and regulatory and federal tax
considerations.

WHEN-ISSUED SECURITIES. The Series may purchase debt obligations on a
'when-issued' basis, that is, for delivery to the Series later than the normal
settlement date for such securities, at a stated price and yield. The Series
currently anticipates that when-issued securities will not exceed 10% of its
total assets. The Series generally would not pay for such securities or start
earning interest on them until they are received. However, when the Series
undertakes a when-issued purchase obligation, it will immediately assume the
risks of ownership, including the risk of price fluctuation. When the Series
purchases securities on a when-issued basis, its custodian will set aside in a
segregated account, cash or liquid high-grade debt securities with a market
value equal to the amount of the commitment. If necessary, additional assets
will be placed in the account daily so that the value of the account will equal
or exceed the amount of the Series' purchase commitment. Failure by the issuer
to deliver a security purchased on a when-issued basis may result in a loss or
missed opportunity to make an alternative investment.

REPURCHASE AGREEMENTS. Repurchase agreements are transactions in which the
Series purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed upon date and price reflecting a market rate of interest unrelated to the
coupon rate or maturity of the purchased securities. The Series would maintain
custody of the underlying securities prior to their repurchase; thus, the
obligation of the bank or dealer to pay the repurchase price on the date agreed
to would be, in effect, secured by such securities. If the value of such
securities were less than the repurchase price, plus any agreed-upon additional
amount, the other party to the agreement would be

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required to provide additional collateral so that at all times the collateral is
at least equal to the repurchase price plus any agreed-upon additional amount.

The Series normally may invest up to 10% of its total assets in repurchase
agreements with respect to securities in which the Series otherwise may invest.
Repurchase agreements carry certain risks not associated with direct investments

in securities, including possible declines in the market value of the underlying
securities and delays and costs to the Series if the other party to a repurchase
agreement becomes bankrupt. The Series intends to enter into repurchase
agreements only with banks and dealers in transactions believed by MHII to
present minimal credit risks in accordance with guidelines established by the
Series' Board of Directors. MHII will review and monitor the creditworthiness of
such institutions under the Board's general supervision.

ILLIQUID SECURITIES. The Series may invest up to 15% of its total assets
in illiquid securities. The term 'illiquid securities' for this purpose means
securities that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the Series has valued the
securities and includes, among other things, purchased OTC options, repurchase
agreements maturing in more than seven days and restricted securities other than
Rule 144A securities and commercial paper that MHII has determined are liquid
pursuant to guidelines established by the Series' Board of Directors. IO and PO
classes of mortgage-backed securities supported by fixed-rate mortgages and
issued by the U.S. government or one of its agencies or instrumentalities will
not be considered illiquid if MHII has determined that they are liquid pursuant
to guidelines established by the Series' Board of Directors. The assets used as
cover for OTC options written by the Series will be considered illiquid unless
the OTC options are sold to qualified dealers who agree that the Series may
repurchase any OTC option it writes at a maximum price to be calculated by a
formula set forth in the option agreement. The cover for an OTC option written
subject to this procedure would be considered illiquid only to the extent that
the maximum repurchase price under the formula exceeds the intrinsic value of
the option. Illiquid restricted securities may be sold only in privately
negotiated transactions or in public offerings with respect to which a
registration statement is in effect under the Securities Act of 1933 ('1933
Act'). Where registration is required, the Series may be obligated to pay all or
part of the registration expenses and a considerable period may elapse between
the time of the decision to sell and the time the Series may be permitted to
sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Series might obtain a
less favorable price than prevailed when it decided to sell.

In recent years, a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including private
placements, repurchase agreements, commercial paper, foreign securities and
corporate bonds and notes. These instruments are often restricted securities
because the securities are sold in transactions not requiring registration.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend either on an efficient
institutional market in which such unregistered securities can be readily resold
or on an issuer's ability to honor a demand for repayment. Therefore, the fact
that there are contractual or legal restrictions on resale to the general public
or certain institutions is not dispositive of the liquidity of such investments.

Rule 144A under the 1933 Act establishes a 'safe harbor' from the
registration requirements of the 1933 Act for resales of certain securities to

qualified institutional buyers. Institutional markets for restricted securities
that might develop as a result of Rule 144A could provide both readily
ascertainable values for restricted securities and the ability to liquidate an
investment to satisfy share redemption orders. Such markets might include
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. ('NASD'). An
insufficient number of qualified institutional buyers interested in purchasing
Rule 144A-eligible restricted securities held by

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the Series, however, could affect adversely the marketability of such portfolio
securities and the Series might be unable to dispose of such securities promptly
or at reasonable prices.

The Series' Board of Directors has delegated the function of making
day-to-day determinations of liquidity to MHII, pursuant to guidelines approved
by the Board. MHII takes into account a number of factors in reaching liquidity
decisions, including but not limited to (1) the frequency of trades for the
security, (2) the number of dealers that make quotes for the security, (3) the
number of dealers that have undertaken to make a market in the security, (4) the
number of other potential purchasers and (5) the nature of the security and how
trading is effected (e.g., the time needed to sell the security, how offers are
solicited and the mechanics of transfer). Mitchell Hutchins monitors the
liquidity of restricted securities in the Series' portfolio and reports
periodically on such decisions for the Series to the Board of Directors. The
Series will not invest more than 15% of its total assets in restricted
securities other than Rule 144A securities and commercial paper that MHII has
determined are liquid pursuant to these guidelines.

LENDING OF PORTFOLIO SECURITIES. Although the Series has no current
intention to do so, the Series is authorized to lend up to 10% of the total
value of its portfolio securities to broker-dealers or institutional investors
that MHII deems qualified, but only when the borrower maintains with the Series'
custodian collateral, either in cash or money market instruments, in an amount
at least equal to the market value of the securities loaned, plus accrued
interest and dividends, determined on a daily basis and adjusted accordingly. In
determining whether to lend securities to a particular broker-dealer or
institutional investor, MHII will consider, and during the period of the loan
will monitor, all relevant facts and circumstances, including the
creditworthiness of the borrower. The Series will retain authority to terminate
any loans at any time. The Series may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or money market instruments held as collateral to
the borrower or placing broker. The Series will receive reasonable interest on
the loan or a flat fee from the borrower and amounts equivalent to any
dividends, interest or other distributions on the securities loaned. The Series
will regain record ownership of loaned securities to exercise beneficial rights,
such as voting and subscription rights and rights to dividends, interest or

other distributions, when regaining such rights is considered by MHII to be in
the Series' interest.

LEVERAGE AND BORROWING. Although the Series has no present intention to do
so, the Series is authorized to borrow up to an amount equal to approximately
33 1/3% of its total assets (including the amount borrowed). Any such borrowings
would create leverage, a speculative factor. If the income earned by the Series
on the assets obtained through leverage exceeds the interest and other expenses
paid thereon, the Series' net income will be greater than if the leverage had
not occurred. Conversely, if the income on such assets is insufficient to cover
the costs of the leverage, the Series' net income will be less. The Shares may
involve a high degree of risk because the Series may leverage more than 10% of
its total assets. The Series will not enter into leverage transactions unless
Mitchell Hutchins and MHII believe that the income earned on the additional
investments acquired with the borrowed funds is likely to exceed the cost of the
leverage and, therefore, would increase the income earned by the Series.

The Series may not declare any dividend (except a dividend payable in the
Series' capital stock) or any other distribution on its Shares, and may not
purchase any Shares, unless at the time of such declaration or purchase, the
amount of the Series' outstanding borrowings does not exceed 33 1/3% of the
Series' total assets (computed as specified in the 1940 Act) after deducting the
amount of such dividend, distribution or purchase. Therefore, the Series would
be prohibited from paying any Cash Dividend or Reinvestment Dividend if such
payment would result in the Series failing to comply with such 33 1/3%
requirement.

The Series may enter into reverse repurchase agreements with the same
parties with which it may enter into repurchase agreements. Under a reverse
repurchase agreement, the Series sells securities and agrees to

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<PAGE>
repurchase them at a mutually agreed date and price. At the time the Series
enters into a reverse repurchase agreement or a 'dollar roll' (as described
below), it establishes and will maintain a segregated account with an approved
custodian containing cash or liquid high-grade debt securities having a value
not less than the repurchase price (including accrued interest). The market
value of securities sold under reverse repurchase agreements typically is
greater than the proceeds of the sale, and accordingly, the market value of the
securities sold is likely to be greater than the value of the securities in
which the Series invests those proceeds. Thus, reverse repurchase agreements
involve the risk that the buyer of the securities sold by the Series might be
unable to deliver them when the Series seeks to repurchase. In the event the
buyer of securities under a reverse repurchase agreement files for bankruptcy or
becomes insolvent, such buyer or its trustee or receiver may receive an
extension of time to determine whether to enforce the Series' obligation to
repurchase the securities, and the Series' use of the proceeds of the reverse

repurchase agreement may effectively be restricted pending such decision.

The Series also may enter into 'dollar rolls,' in which the Series sells
mortgage-backed or other securities for delivery in the current month and
simultaneously contracts to purchase substantially similar securities on a
specified future date. In the case of dollar rolls involving mortgage-backed
securities, the mortgage-backed securities that are purchased would be of the
same type, and will have the same interest rate and maturity, as those sold but
would be supported by different pools of mortgages. The Series would forgo
principal and interest paid during the roll period on the securities sold in a
dollar roll, but the Series would be compensated by the difference between the
current sales price and the lower price for the future purchase, as well as by
the interest earned on the proceeds of the securities sold. The Series also
could be compensated through the receipt of fee income equivalent to a lower
forward price.

Reverse repurchase agreements and dollar rolls will be treated as
borrowings for purposes of calculating the Series' borrowing limitation. In
addition to the foregoing borrowings, the Series may borrow money for temporary
or emergency purposes (e.g., clearance of transactions, fractional share
repurchases or payments of dividends to shareholders) in an amount not exceeding
5% of the value of the Series' total assets (not including the amount borrowed).
See 'Investment Limitations.'

PORTFOLIO TURNOVER. For the fiscal years ended June 30, 1995 and June 30,
1994, the portfolio turnover rate of the Series was 223.49% and 298.05%,
respectively. The portfolio rate for the fiscal year ended June 30, 1995 was due
primarily to the Series' use of futures contracts to assist in managing the
duration of the portfolio.

The Series' portfolio turnover rate will not be a limiting factor when MHII
deems portfolio changes appropriate. The Series will liquidate all of its assets
on or about its Termination Date. The portfolio turnover rate is calculated by
dividing the lesser of the Series' annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
such securities in the portfolio during the year. A high turnover rate involves
correspondingly greater transaction costs, which will be borne directly by the
Series, and increases the potential for short-term capital gains and taxes to
shareholders when those gains are distributed.

SPECIAL CONSIDERATIONS AND RISK FACTORS

The information contained within the heading 'Investment Objectives and
Policies' under the subheadings 'Zero Coupon Securities,' 'Hedging and Related

Income Strategies,' 'When-Issued Securities,' 'Repurchase Agreements,' 'Illiquid
Securities,' 'Lending of Portfolio Securities,' 'Leverage and Borrowing' and
'Portfolio Turnover' includes a description of certain risk factors and should
be read in conjunction with this heading.

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SECURITIES OF NON-U.S. ISSUERS. The Series may invest in U.S.
dollar-denominated securities issued by non-U.S. issuers and supra-national
organizations (such as the World Bank). Investments in securities of non-U.S.
issuers involve certain risks not ordinarily associated with investments in
securities of domestic issuers. Such risks include future political and economic
developments, and the possible imposition of exchange controls or other foreign
governmental laws or restrictions. Since the instruments in which the Series may
invest are denominated or quoted in the U.S. dollar, changes in foreign currency
exchange rates will not affect the value of such securities in the portfolio nor
will such changes affect the unrealized appreciation or depreciation of
investments so far as U.S. investors are concerned. With respect to certain
countries, there is the possibility of expropriation of assets, confiscatory
taxation, political or social instability or diplomatic developments which could
adversely affect investments in those countries.

There may be less publicly available information about a foreign company
than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to or as uniform as those of U.S. companies. Non-U.S. securities
markets (other than Japan), while growing in volume, have, for the most part,
substantially less volume than U.S. markets, and securities of many foreign
companies are less liquid and their prices more volatile than securities of
comparable U.S. companies. Transaction costs on non-U.S. securities markets are
generally higher than in the United States and settlement procedures are often
not as regularized as in the United States. There is generally less government
supervision and regulation of exchanges, brokers and issuers than there is in
the United States. The Series may have greater difficulty taking appropriate
legal action with respect to foreign investments in non-U.S. courts than with
respect to domestic issuers in U.S. courts.

DURATION MANAGEMENT; REINVESTMENT OF DIVIDENDS. The principal means by
which the Series seeks to achieve its investment objective is the management of
the composition and duration of its investment portfolio. The duration of a
fixed-income security is the weighted average time to maturity of the present
value of the cash flows (including payments of interest and repayments of
principal) of that security. MHII attempts to manage the duration of the Series'
portfolio by buying and selling securities so that the payment schedules of the
securities in the Series' portfolio will, on a dollar-weighted average basis,
correspond to, or be shorter than, the cash distributions expected to be made to
shareholders and the payments on any borrowings by the Series. MHII believes
that, by managing the duration of the Series' portfolio, it can balance changes
in interest rates against changes in the net asset value of the Series in order
to manage the interest rate sensitivity of the portfolio.

MHII attempts to obtain for the Series the best total return on investments
meeting the Series' investment criteria while maintaining a duration of the
Series' portfolio that corresponds to, or is shorter than, the period remaining
until the Series' Termination Date, adjusted for the cash distributions expected
to be made to shareholders and the payments on any borrowings by the Series.
Accordingly, MHII generally will not acquire longer term securities that might
pay higher rates of return to the Series or attempt to realize capital gains
that might be available to the Series due to changes in market interest rates if
doing so would adversely affect the duration of the Series. While this duration
management strategy might result in the Series forgoing higher yields or capital
gains that might become available, MHII believes that such duration management
will enable it to minimize the exposure of the Series' portfolio from interest
rate risk and thereby help to achieve the Series' investment objectives.

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during the life of the Series, a portion of the Series' total return is likely
to be realized in the form of capital gains, while the yield available on newly
acquired investment securities generally will be lower. If the Series were not
able to retain and reinvest such capital gains, the aggregate amount of net
investment income available for Cash Dividends would be likely to be less than
its Target Return and the amount available for the Series' Termination
Distribution would be likely to be less than $10.00 per Targeted Share. To the
extent that the duration of the Series' portfolio is shorter than the period
remaining until its Termination Date, the Series' investment income could be
reduced without the Series realizing corresponding capital gains. No assurance
can be given that the Series will be able to achieve its investment objective.

In order to continue to qualify for treatment as a regulated investment
company under federal tax law and to avoid the imposition of federal income and
excise taxes at the Series level, the Series intends to distribute to its
shareholders all of its annual net investment income and capital gains. See
'Taxation.' To the extent that such distributions are made in cash, the Series
will be unable to retain and reinvest excess net investment income and realized
capital gains for the remainder of the life of the Series, and for the reasons
set forth above, the amounts that the Series has available for payment of cash
dividends and for its Termination Distribution are likely to be reduced.

However, distributions of the Series' excess net investment income and
capital gains will be made in the form of Reinvestment Dividends, which
generally will be paid in additional Series Shares. Payment of Reinvestment
Dividends in additional Series Shares will enable the Series to retain and
reinvest the excess net investment income and realized capital gains represented
by those Shares and, thus, will not adversely affect the ability of the Series
to achieve its investment objective. The Series anticipates that only a small
portion of any Reinvestment Dividends will be payable in cash, and MHII believes
that it can manage the Series' portfolio so as to minimize any adverse effect
that such cash payments would have on the Series' total return.

The Reverse Split that is expected to be declared with respect to the
Series' Shares following any Reinvestment Dividend will result in Reinvesting
Shareholders continuing to hold the same number of Shares as they held
immediately before such Reinvestment Dividend originally purchased. This is
intended to enable Reinvesting Shareholders to continue to receive cash
dividends equal to the Target Return and to receive a Termination Distribution
of $10.00 per Targeted Share on each of their Shares. For shareholders who
choose to receive Reinvestment Dividends in cash, however, each Reverse Split
will result in their holding a reduced number of Shares. Therefore, while such
shareholders will receive the same per Share cash dividends and per Share
Termination Distribution as Reinvesting Shareholders, the aggregate amount of
cash dividends received by non-Reinvesting Shareholders is expected to be less
than the Target Return on the number of Shares they originally purchased, and
the aggregate Termination Distribution received by such shareholders is expected
to be less than $10.00 for each such Share.

The payment by the Series of Reinvestment Dividends in cash will have the
effect of reducing the amount of investable funds available to the Series. This
reduction in investable funds will reduce the Series' ability to generate its
Target Return on the amount originally invested in the Series and will reduce
the amounts that will be available for the Series' Termination Distribution.
These reductions will be reflected in a decrease in the relative number of
Series Shares held by non-Reinvesting Shareholders, as compared to Reinvesting
Shareholders, following the payment of each Reinvestment Dividend and the
related Reverse Split.

Although all shareholders will be required to treat Reinvestment Dividends
as ordinary income or long-term capital gains for federal income tax purposes,
Reinvesting Shareholders who accept Reinvestment Dividends in additional Series
Shares will, in effect, be allowing their original investment to remain invested
in the Series. Assuming that the Series achieves its investment objective, this
will enable the Series to continue to pay Cash Dividends to Reinvesting
Shareholders at the Target Return and to make a Termination Distribution

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of at least $10.00 per Targeted Share. Such reinvestment cannot be expected to
result in Reinvesting Shareholders receiving a Termination Distribution of more

than $10.00 per Targeted Share.

By contrast, shareholders that elect to receive Reinvestment Dividends in
cash will, in effect, be receiving an early return of part of their invested
funds. Thus, those shareholders should expect that the aggregate amount of each
subsequent cash dividend that they receive on their originally purchased Shares
will be less than the Target Return on their original investment, and such
shareholders should expect to receive a Termination Distribution that is less
than $10.00 for each of their originally purchased Shares, even if the Series
achieves its investment objective. Following the first Reinvestment Dividend and
the related Reverse Split, all or a portion of the Series Shares held by each
non-Reinvesting Shareholder are likely to be fractional Shares, which will be
illiquid.

SPECIAL CHARACTERISTICS OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES.

Types of Credit Support. Mortgage-backed and asset-backed securities are
backed by pools of assets representing the obligations of a number of different
parties. To lessen the effect of failures by obligors on underlying assets to
make payments, such securities may contain elements of credit enhancement. Such
credit enhancement falls into two categories: (1) liquidity protection and (2)
protection against losses resulting from ultimate default by an obligor on the
underlying assets. Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets (usually the bank,
savings association or mortgage banker that transferred the underlying loans to
the issuer of the security), to ensure that the receipt of payments on the
underlying pool occurs in a timely fashion. Protection against losses resulting
from ultimate default ensures ultimate payment of the obligations on at least a
portion of the assets in the pool. Such protection may be provided through
guarantees, insurance policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring the transaction
or through a combination of such approaches. The Series will not pay any
additional fees for such credit enhancement, although the existence of credit
enhancement may increase the price of a security.

Examples of credit enhancement arising out of the structure of the
transaction include 'senior-subordinated securities' (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of 'spread accounts' or 'reserve funds' (where cash or investments,
sometimes funded from a portion of the payments on the underlying assets, are
held in reserve against future losses) and 'over-collateralization' (where the
scheduled payments on, or the principal amount of, the underlying assets exceeds
that required to make payment of the securities and pay any servicing or other
fees). The degree of credit enhancement provided for each issue generally is
based on historical information respecting the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that anticipated
could adversely affect the return on an investment in such a security.

Yield and Prepayment Characteristics. Since the inception of the mortgage
pass-through security in 1970, the market for mortgage-backed securities has

expanded considerably. The size of the primary issuance market, and active
participation in the secondary market by securities dealers and many types of
investors, makes government and government-related pass-through pools highly
liquid. Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. The average life of pass-through pools
varies with the maturities of the underlying mortgage loans. A pool's term may
be shortened by unscheduled or early payments of principal on the underlying
mortgages. The occurrence of mortgage prepayments is affected by various
factors, including the level of interest rates, general economic conditions, the
location, scheduled maturity and age of the mortgage and other social and
demographic conditions. Because prepayment rates of individual pools vary
widely, it is not possible to predict accurately the average life of a
particular pool. In the past, a common

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industry practice has been to assume that prepayments on pools of fixed rate
30-year mortgages would result in a 12-year average life for the pool. At
present, mortgage pools, particularly those with loans with other maturities or
different characteristics, are priced on an assumption of average life
determined for each pool. In periods of falling interest rates, the rate of
prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising rates the
rate of prepayment tends to decrease thereby lengthening the actual average life
of the pool. However, these effects may not be present, or may differ in degree,
if the mortgage loans in the pools have adjustable interest rates or other
special payment terms, such as a prepayment charge. Actual prepayment experience
may cause the yield of mortgage-backed securities to differ from the assumed
average life yield. Reinvestment of prepayments may occur at higher or lower
interest rates than the original investment, thus affecting the yield of the
Series.

The rate of interest on mortgage-backed securities is lower than the
interest rates paid on the mortgages included in the underlying pool due to the
annual fees paid to the servicer of the mortgage pool for passing through
monthly payments to certificateholders and to any guarantor, such as GNMA, and
due to any yield retained by the issuer. Actual yield to the holder may vary
from the coupon rate, even if adjustable, if the mortgage-backed securities are
purchased or traded in the secondary market at a premium or discount. In
addition, there is normally some delay between the time the issuer receives
mortgage payments from the servicer and the time the issuer makes the payments
on the mortgage-backed securities and this delay reduces the effective yield to
the holder of such securities.

The yield characteristics of mortgage-backed and asset-backed securities
differ from those of traditional debt securities. Among the major differences
are that interest and principal payments are made more frequently, usually
monthly, and that principal may be prepaid at any time because the underlying
mortgage loans or other assets generally may be prepaid at any time. As a
result, if the securities are purchased at a premium, a prepayment rate that is
faster than expected will reduce yield to maturity, while a prepayment rate that
is slower than expected will have the opposite effect of increasing yield to
maturity. Conversely, if the securities are purchased at a discount, faster than

expected prepayments will increase, while slower than expected prepayments will
reduce, yield to maturity. Amounts available for reinvestment are likely to be
greater during a period of declining interest rates and are likely to be
reinvested at lower interest rates than during a period of rising interest
rates. Accelerated prepayments on securities purchased at a premium also impose
a risk of loss of principal because the premium may not have been fully
amortized at the time the principal is repaid in full. Investments in derivative
securities such as SMBSs are more sensitive to changes in prepayment and
interest rates than traditional debt securities and mortgage-backed and
asset-backed securities.

Prepayments on a pool of mortgage loans are influenced by a variety of
economic, geographic, social and other factors, including changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties and servicing decisions. Generally, however, prepayments on
fixed-rate mortgage loans will increase during a period of falling interest
rates and decrease during a period of rising interest rates. Similar factors
apply to prepayments on asset-backed securities but the receivables underlying
asset-backed securities generally are of a shorter maturity and thus are less
likely to experience substantial prepayments. Such securities, however, often
provide that for a specified time period the issuers will replace receivables in
the pool that are repaid with comparable obligations. If the issuer is unable to
do so, repayment of principal on the asset-backed securities may commence at an
earlier date. Mortgage-backed and asset-backed securities may decrease in value
as a result of increases in interest rates and may benefit less than other
fixed-income securities from declining interest rates because of the risk of
prepayment.

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<PAGE>
MHII anticipates that it will be able to limit the Series' exposure to the
risks of varying prepayment patterns on mortgage-backed and asset-backed
securities by investing in PAC Bonds and in asset-backed securities having
structures similar to PAC Bonds.

Synthetic Securities. The Series may utilize IO and PO classes of one or
more mortgage-backed or asset-backed securities to create synthetic securities
that are expected to have substantially the same characteristics as ordinary PAC
Bonds or comparable asset-backed securities. MHII would attempt to create such
synthetic securities when it believes that it can obtain a yield or other
advantages that are more desirable than those that can be obtained from ordinary
PAC Bonds or comparable asset-backed securities that then are available in the
market.

The yields to maturity and durations of IO and PO classes of securities
normally are extremely sensitive to the rate of principal payments on the
underlying mortgage assets. However, MHII intends to structure synthetic PAC
Bonds using IO and PO classes as to which decreases or increases in the yield to
maturity or duration of the IO class are expected to be offset by increases or
decreases, respectively, in the yield and duration of the corresponding PO
class. To the extent that such increases and decreases with respect to the IO
and PO classes of synthetic securities are not fully correlated, however, the

Series may realize a smaller yield than could have been achieved with ordinary
securities that would have been available in the market and might incur changes
to the duration of its portfolio that could increase the Series' exposure to
interest rate risks.

OTHER FACTORS. When MHII believes that unusual circumstances warrant and
shortly prior to the Series' Termination Date, the Series may hold up to all of
its assets in cash and high-grade money market instruments. Such instruments may
include securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, commercial paper rated at least A-1+ by S&P or Prime-1 by
Moody's (or if not rated by S&P or Moody's, determined by MHII to be of
comparable quality), bank certificates of deposit, bankers' acceptances and
repurchase agreements secured by the foregoing. The Series may also engage in
short sales of securities 'against the box' to defer realization of gains or
losses for tax or other purposes.

Shares of closed-end investment companies are not redeemable and frequently
trade at a discount to net asset value. Accordingly, there is a risk that, for
example, a shareholder of the Series who sells his Shares at a time when the
Shares are trading at a discount to net asset value could incur a loss of
capital even if the net asset value of the Series has not declined since the
shareholder purchased his Shares. This market risk is separate and distinct from
the risk that the Series' net asset value will decrease. Market risks may be
greater for investors in the Series than for investors in many other closed-end
investment companies because the Shares will not be listed on any securities
exchange. Investors should recognize that the Series is designed primarily for
Reinvesting Shareholders, who will invest for a term equal to the life of the
Series and not as a trading vehicle.

INVESTMENT LIMITATIONS

The Series has adopted certain investment limitations which, like the
Series' investment objective, may not be changed without the approval of its
shareholders. The Series may not:

(1) issue senior securities (including borrowing money from banks and
other entities, reverse repurchase agreements and dollar rolls) in excess
of 33 1/3% of its total assets (including the amount of senior securities
issued, but excluding any liabilities and indebtedness not constituting
senior securities), except that the Series may borrow up to an additional
5% of its total assets (not including the amount borrowed) for temporary or
emergency purposes;

(2) purchase the securities of any issuer if as a result more than 5%
of its total assets would be invested in the securities of that issuer;

provided that securities issued or guaranteed by the U.S.

26
<PAGE>
government, its agencies and instrumentalities are not subject to this
limitation and further provided that up to 25% of the value of the Series'
assets may be invested without regard to this limitation;

(3) make an investment in any one industry if the investment would
cause the aggregate value of all of the Series' investments in such
industry to equal 25% or more of the Series' total assets, provided that
this limitation shall not apply with respect to investments in securities
issued or guaranteed by the U.S. government or its agencies or
instrumentalities, and provided further that this limitation also shall not
apply to investments in mortgage-backed and asset-backed securities
(whether or not issued or guaranteed by an agency or instrumentality of the
U.S. government), which shall be considered a single industry for purposes
of this limitation;

(4) purchase securities on margin, except for short-term credits
necessary for clearance of portfolio transactions, and except that the
Series may make margin deposits in connection with its use of options,
futures contracts and options on futures contracts;

(5) engage in the business of underwriting securities of other
issuers, except to the extent that, in connection with the disposition of
portfolio securities, the Series may be deemed an underwriter under federal
securities laws and except that the Series may write options;

(6) make short sales of securities or maintain a short position,
except that the Series may maintain short positions in connection with its
use of options, futures contracts and options on futures contracts and sell
short 'against the box;'

(7) purchase or sell real estate (including real estate limited
partnership interests), provided that the Series may invest in securities
secured by real estate or interests therein or issued by companies that
invest in real estate or interests therein;

(8) purchase or sell commodities or commodity contracts, except that
the Series may purchase or sell financial futures contracts and options
thereon;

(9) invest in oil, gas or mineral-related programs or leases;

(10) make loans, except through loans of portfolio instruments,
reverse repurchase agreements and repurchase agreements, provided that for
purposes of this restriction the acquisition of bonds, debentures or other
debt instruments or interests therein and investment in government
obligations, short-term commercial paper, certificates of deposit and
bankers' acceptances shall not be deemed to be the making of a loan; or

(11) invest in the securities of an open-end investment company.

The foregoing fundamental investment limitations, as well as the Series'
investment objective, cannot be changed without the affirmative vote of the
lesser of (a) more than 50% of the Series' outstanding Shares or (b) 67% or more
of the Shares of the Series present at a shareholders' meeting if more than 50%
of the outstanding Shares are represented at the meeting in person or by proxy.
If a percentage restriction is adhered to at the time of an investment or
transaction, a later increase or decrease in percentage resulting from a change
in values of portfolio securities or the amount of total assets will not be
considered a violation of any of the foregoing limitations or of any of the
Series' investment policies.

27
<PAGE>
DIRECTORS AND OFFICERS

The overall management of the business and affairs of the Series is vested
with its Board of Directors. The Board of Directors approves all significant
agreements between the Series and persons or companies furnishing services to
it, including the Series' agreements with its investment adviser and
administrator, custodian, and transfer and dividend disbursing agent and
registrar. The day-to-day operations of the Series are delegated to its officers
and to Mitchell Hutchins and MHII, subject always to the investment objective
and policies of the Series and to general supervision by the Series' Board of
Directors.

The same individuals serve as the directors and executive officers of the
Series; their business addresses and principal occupations during the past five
years are:

<TABLE>
<CAPTION>
NAME, ADDRESS* AND AGE POSITION WITH THE SERIES BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
- ---------------------------- ------------------------ --------------------------------------------------
<S> <C> <C>
E. Garrett Bewkes, Jr.**; 68 Director and Chairman of Mr. Bewkes is a director of Paine Webber Group
the Board of Directors Inc. ('PW Group') (holding company of

PaineWebber and Mitchell Hutchins) and a con-
sultant to PW Group. Prior to 1988, he was
chairman of the board, president and chief
executive officer of American Bakeries Company.

Mr. Bewkes is also a director of Interstate
Bakeries Corporation and NaPro BioTherapeutics,
Inc. and a director or trustee of 26 other
investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.

John R. Torell III; 56 Director Mr. Torell is chairman of Torell Management, Inc.
767 Fifth Avenue (financial advisory firm) (since 1989). He is
Suite 4605 the former chairman and chief executive officer
New York, NY 10153 of Fortune Bancorp (1990-1991 and 1990-1994,
respectively). He is the former chairman,
president and chief executive officer of CalFed,
Inc. (savings association) (1988 to 1989) and
former president of Manufacturers Hanover Corp.
(bank) (prior to 1988). Mr. Torell is also a
director of American Home Products Corp., Volt
Information Sciences Inc., and a director or
trustee of seven other investment companies for
which Mitchell Hutchins or PaineWebber serves as
investment adviser.

William D. White; 61 Director Mr. White is retired. From February 1989 through
P.O. Box 199 March 1994, he was president of the National
Upper Black Eddy, PA 18972 League of Professional Baseball Clubs. Prior to
1989, he was a television sportscaster for
WPIX-TV, New York. He is also a director or
trustee of eight other investment companies for
which Mitchell Hutchins or PaineWebber serves as
investment adviser.

Margo N. Alexander; 48 President Mrs. Alexander is president, chief executive
officer and a director of Mitchell Hutchins.
Prior to
</TABLE>

28
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS* AND AGE POSITION WITH THE SERIES BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
- ---------------------------- ------------------------ --------------------------------------------------
<S> <C> <C>
January 1995, Mrs. Alexander was an executive
vice president of PaineWebber. Mrs. Alexander is
also a trustee of two other investment companies
and president of 38 other investment companies
for which Mitchell Hutchins or PaineWebber
serves as investment adviser.

Teresa M. Boyle; 36 Vice President Ms. Boyle is a first vice president and manager--
advisory administration of Mitchell Hutchins.
Prior to November 1993, she was compliance
manager of Hyperion Capital Management, Inc., an
investment advisory firm. Prior to April 1993,
Ms. Boyle was a vice president and
manager--legal administration of Mitchell
Hutchins. Ms. Boyle is also a vice president of
38 other investment companies for which Mitchell
Hutchins or PaineWebber serves as investment
adviser.

Joan L. Cohen; 31 Vice President and Ms. Cohen is a vice president and attorney of
Assistant Secretary Mitchell Hutchins. Prior to December 1993, she
was an associate at the law firm of Seward &
Kissel. Ms. Cohen is also a vice president and
assistant secretary of 25 other investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.

C. William Maher; 34 Vice President and Mr. Maher is a first vice president and the senior
Assistant Secretary manager of the Fund Administration Division of
Mitchell Hutchins. Mr. Maher is also a vice
president and assistant treasurer of 38 other
investment companies for which Mitchell Hutchins
or PaineWebber serves as investment adviser.

Ann E. Moran; 38 Vice President and Ms. Moran is a vice president of Mitchell
Assistant Treasurer Hutchins. Ms. Moran is also a vice president and
assistant treasurer of 38 other investment
companies for which Mitchell Hutchins or
PaineWebber serves as investment adviser.

Dianne E. O'Donnell; 43 Vice President and Ms. O'Donnell is a senior vice president and
Secretary deputy general counsel of Mitchell Hutchins. Ms.
O'Donnell is also a vice president and secretary
of 38 other investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.

Victoria E. Schonfeld; 44 Vice President Ms. Schonfeld is a managing director and general
counsel of Mitchell Hutchins. From April 1990 to
May 1994, she was a partner in the law firm of
Arnold & Porter. Prior to April 1990, she was a
</TABLE>

29
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS* AND AGE POSITION WITH THE SERIES BUSINESS EXPERIENCE; OTHER DIRECTORSHIPS
- ---------------------------- ------------------------ --------------------------------------------------
<S> <C> <C>
partner in the law firm of Shereff, Friedman,

Hoffman & Goodman. Ms. Schonfeld is also a vice
president of 38 other investment companies for
which Mitchell Hutchins or PaineWebber serves as
investment adviser.

Paul H. Schubert; 32 Vice President and Mr. Schubert is a first vice president of Mitchell
Assistant Treasurer Hutchins. From August 1992 to August 1994, he
was a vice president at BlackRock Financial
Management, Inc. Prior to August 1992, he was an
audit manager with Ernst & Young LLP. Mr.
Schubert is also a vice president and assistant
treasurer of 38 other investment companies for
which Mitchell Hutchins or PaineWebber serves as
investment adviser.

Julian F. Sluyters; 35 Vice President and Mr. Sluyters is a senior vice president and the
Treasurer director of the mutual fund finance division of
Mitchell Hutchins. Prior to 1991, he was an
audit senior manager with Ernst & Young LLP. Mr.
Sluyters is also a vice president and treasurer
of 38 other investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.

Gregory K. Todd; 38 Vice President and Mr. Todd is a first vice president and associate
Assistant Secretary general counsel of Mitchell Hutchins. Prior to
1993, he was a partner in the law firm of
Shereff, Friedman, Hoffman & Goodman. Mr. Todd
is also a vice president and assistant secretary
of 38 other investment companies for which
Mitchell Hutchins or PaineWebber serves as
investment adviser.
</TABLE>

- ------------------

* Unless otherwise indicated, the business address of each listed person is 1285
Avenue of the Americas, New York, New York 10019.

**Mr. Bewkes is an 'interested person' of the Series, as defined in the 1940
Act, by virtue of his position with PW Group.

30
<PAGE>

The Series pays directors who are not 'interested persons' of the Series
$3,000 annually and $250 per meeting of the Board of Directors or any committee
thereof. Directors are also reimbursed for any expenses incurred in attending
meetings. Because Mitchell Hutchins and MHII perform substantially all of the
services necessary for the operation of the Series, it requires no employees. No
officer, director or employee of PaineWebber, Mitchell Hutchins or MHII

presently receives any compensation from the Series for acting as a director or
officer. The table below includes certain information relating to the
compensation of the Series' directors.

COMPENSATION TABLE

<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION
BENEFITS ACCRUED ESTIMATED FROM THE SERIES
AGGREGATE AS PART OF THE ANNUAL AND THE FUND
COMPENSATION SERIES' BENEFITS UPON COMPLEX PAID
NAME OF PERSON, POSITION FROM THE SERIES* EXPENSES RETIREMENT TO DIRECTORS+
- ---------------------------------------- ---------------- ---------------- ------------- ---------------

<S> <C> <C> <C> <C>
E. Garrett Bewkes, Jr.,
Director and chairman of the board of
directors............................. -- -- -- --

John R. Torell III, Director............ $3,750 -- -- $39,750

William D. White, Director.............. 3,250 -- -- 33,250
</TABLE>

- ------------------

* Represents fees paid to each director during the fiscal year ended June 30,
1995.

+ Represents total compensation paid to each director by the Trust Complex
during the twelve months ended December 31, 1994.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of August 9, 1995, Kray & Co. (the nominee of Midwest Securities Trust
Company, a securities depository) owned of record 3,851,987 Shares or 90.7% of
the outstanding Shares of the Series and Cede & Co. (the nominee of The
Depository Trust Company, a securities depository) owned of record 363,380
Shares or 8.5% of the outstanding Shares of the Series. To the knowledge of the
Series, no person is the beneficial owner of 5% or more of its Shares.

As of July 31, 1995, the directors and officers of the Series as a group

beneficially owned less than 1% of the Series' outstanding Shares.

31
<PAGE>
MANAGEMENT OF THE SERIES

INVESTMENT ADVISORY AND ADMINISTRATION ARRANGEMENTS. Subject to the
supervision of the Series' Board of Directors, investment advisory and
administration services are provided to the Series by Mitchell Hutchins pursuant
to an Investment Advisory and Administration Contract, dated June 29, 1992 (the
'Advisory Contract'). Pursuant to the Advisory Contract, Mitchell Hutchins
provides a continuous investment program for the Series and makes investment
decisions and places orders to buy, sell or hold particular securities; Mitchell
Hutchins also supervises all matters relating to the operation of the Series and
provides for its corporate officers, clerical staff, office space, equipment and
services. As compensation for its services, Mitchell Hutchins is entitled to
receive a fee from the Series, computed weekly and payable monthly, in an amount
equal to the annual rate of 1.00% of the Series' average weekly net assets. Such
administration and advisory fee rates are higher than those paid by most other
investment companies.

During the fiscal years ended June 30, 1995 and June 30, 1994, Mitchell
Hutchins accrued and waived advisory and administration fees of $396,594 and
$412,222, respectively. During the fiscal year ended June 30, 1993, Mitchell
Hutchins earned advisory and administration fees of $420,988 (of which $4,210
was waived) for the Series.

In addition to the payments to Mitchell Hutchins under the Advisory
Contracts described above, the Series pays certain other costs including: (1)
the costs (including brokerage commissions) of securities purchased or sold by
the Series and any losses incurred in connection therewith; (2) expenses
incurred on behalf of the Series by Mitchell Hutchins; (3) organizational and
offering expenses of the Series, whether or not advanced by Mitchell Hutchins;
(4) filing fees and expenses relating to the registration and qualification of
the Series' Shares under federal and state securities laws; (5) fees and
salaries payable to directors who are not interested persons of the Series or
Mitchell Hutchins; (6) all expenses incurred in connection with the directors'
services, including travel expenses; (7) taxes (including any income or
franchise taxes) and governmental fees; (8) costs of any liability,
uncollectible items of deposit and any other insurance or fidelity bonds; (9)
any costs, expenses or losses arising out of a liability of or claim for damages
or other relief asserted against the Series for violation of any law; (10)
legal, accounting and auditing expenses, including legal fees of special counsel
for the independent directors; (11) charges of custodians, transfer agents and
other agents; (12) costs of preparing any share certificates; (13) expenses of
printing and distributing reports to shareholders; (14) any extraordinary
expenses (including fees and disbursements of counsel) incurred by the Series;
(15) fees, voluntary assessments and other expenses incurred in connection with

membership in investment company organizations; (16) costs of mailing and
tabulating proxies and costs of meetings of shareholders, the Board and any
committees thereof; (17) the costs of investment company literature and other
publications provided to directors and officers; (18) costs of mailing,
stationery and communications equipment; (19) interest charges on borrowings;
and (20) fees and expenses of listing and maintaining any listing of the Series'
Shares on the Amex or any other national securities exchange.

To date, the net investment income of the Series has not been sufficient to
pay monthly dividends at either its original or its lower, revised Target Return
rate and still cover all operating expenses, including the investment advisory
and administrative fees payable to Mitchell Hutchins. The Series' current net
asset value is less than $10.00 per Targeted Share and there is no assurance
that portfolio gains or undistributed income for the Series will be sufficient
to recoup that differential. In addition to the waiver of advisory and
administration fees noted above, Mitchell Hutchins voluntarily reimbursed the
Series $179,315 for all of its expenses incurred during the fiscal year ended
June 30,1995. Mitchell Hutchins also paid the Series $250,000 ($0.06 per share)
on June 27, 1995 to increase its net assets so that the Series would be better
positioned to make a Termination Distribution of $10.00 per Targeted Share.
Mitchell Hutchins intends to continue to waive all or a portion of its fees
and/or reimburse Series operating expenses to the extent necessary to assist

32
<PAGE>
the Series to make a Termination Distribution of $10.00 per Targeted Share,
although it is under no obligation to do so. Under current conditions, it is
anticipated that the Series would not be able to distribute $10.00 per share on
its Termination Date unless Mitchell Hutchins makes an additional cash payment.
Mitchell Hutchins is considering making such a cash payment, although it is
under no obligation to do so.

As required by state regulation, Mitchell Hutchins will reimburse the
Series if and to the extent that the aggregate operating expenses of the Series
in any fiscal year exceed applicable limits.

Pursuant to a contract with Mitchell Hutchins, dated June 29, 1992 (the
'Sub-Advisory Contract'), MHII provides the Series with a continuous investment
program and makes investment decisions and places orders to buy, sell or hold
particular securities. MHII serves as the Series' Sub-Adviser. Under the
Sub-Advisory Contract, Mitchell Hutchins (not the Series) pays MHII a fee,
computed weekly and payable monthly, in an amount equal to the annual rate of up
to a maximum of 0.325% of the Series' average weekly net assets. MHII bears all
expenses incurred by it in connection with its services under the Sub-Advisory
Contract. During the fiscal years ended June 30, 1995 and June 30, 1994,
Mitchell Hutchins (not the Series) did not accrue any fees payable to MHII due
to waivers of all fees by Mitchell Hutchins. Had Mitchell Hutchins not waived
all its fees, MHII would have earned fees in the amounts of $128,893 and

$133,972, respectively. During the fiscal year ended June 30, 1993, Mitchell
Hutchins (not the Series) accrued sub-advisory fees payable to MHII of $134,716
for the Series. Such amounts reflect reductions in the fees paid to MHII of
$2,105 for the Series due to waivers of fees by Mitchell Hutchins.

Unless sooner terminated, the Advisory Contract and the Sub-Advisory
Contract (collectively, 'Contracts') for the Series will remain in effect for
two years from their execution. Thereafter, if not terminated, the Contracts
will continue automatically for successive annual periods, provided that such
continuance is specifically approved at least annually (1) by a majority vote of
the Series' independent directors cast in person at a meeting called for the
purpose of voting on such approval, and (2) by the Board or by vote of a
majority of the outstanding voting securities of the Series. The Contracts will
be submitted to the shareholders of the Series for their approval at their first
meeting following the offering of the Series' Shares.

Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Series in
connection with the Advisory Contract, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of Mitchell Hutchins in
the performance of its duties or from reckless disregard of its duties and
obligations under the Advisory Contract. Under the Sub-Advisory Contract, MHII
will not be liable for any error of judgment or mistake of law or for any loss
suffered by the Series, its shareholders or Mitchell Hutchins in connection with
the Sub-Advisory Contract, except any liability to the Series, its shareholders
or Mitchell Hutchins to which MHII would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its obligations
and duties under the Sub-Advisory Contract.

The Series' Advisory Contract is terminable by vote of the Board of
Directors or by the holders of a majority of the outstanding voting securities
of the Series, at any time without penalty, on 60 days' written notice to
Mitchell Hutchins. The Advisory Contract may also be terminated by Mitchell
Hutchins on 60 days' written notice to the Fund. The Advisory Contract
terminates automatically upon assignment.

The Sub-Advisory Contract is terminable by vote of the Series' Board of
Directors, or by the holders of a majority of the outstanding voting securities
of the Series, at any time without penalty, on 60 days' written notice to MHII.
The Sub-Advisory Contracts may also be terminated by either party on 60 days'
notice to the other party, or on 60 days' notice to MHII by the Board of
Directors of the Series. The Sub-Advisory Contract automatically terminates upon
assignment and upon the termination of the Advisory Contract.

33
<PAGE>

As investment adviser and administrator of the Series, Mitchell Hutchins is
responsible for supervising all matters relating to the operation of the Series,
including the management of the Series' portfolio by MHII. The day-to-day
management of the Series' portfolio is the responsibility of members of the
Fixed Income Group of MHII. The members of the Fixed Income Group primarily
responsible for managing the portfolio are Nirmal Singh, a vice president of
MHII who has been a manager of the Series since February 1994 and Craig M.
Varrelman, CFA, a first vice president of MHII who has managed the Series since
July 1995. Prior to joining MHII in 1993, Mr. Singh was with Merrill Lynch Asset
Management, Inc., where he was a member of the portfolio management team
responsible for managing several diversified funds, including mortgage-backed
securities funds with assets totaling $8 billion. From 1990 to 1993, Mr. Singh
was a senior portfolio manager at Nomura Mortgage Fund Management Corporation,
where he was responsible for managing $3 billion in mortgage assets. Mr.
Varrelman has been with Mitchell Hutchins as a portfolio manager since 1988 and
manages fixed income portfolios with assets totaling approximately $1.5 billion,
with an emphasis on U.S. government securities.

DIVIDENDS AND OTHER DISTRIBUTIONS; REVERSE SPLITS

DIVIDENDS AND OTHER DISTRIBUTIONS. The Series normally pays monthly Cash
Dividends from its net investment income and distributes any net investment
income in excess of its Target Return, and any realized capital gains through
annual Reinvestment Dividends that will be paid in additional Shares of the
Series unless a shareholder elects to receive them in cash. Cash Dividends are
declared monthly and paid on or about the last business day of each month.
Reinvestment Dividends, if any, are declared annually in December of each year
and are paid shortly thereafter. In any year, the Series may elect not to
declare and pay a Reinvestment Dividend (and effect a related Reverse Split),
but instead elect to pay any federal income or excise tax on undistributed net
realized capital gains and excess income. The Series would not make this
election unless, in the judgment of management, the total amount of the taxes
due would be less than the expense of effecting the Reinvestment Dividend and
related Reverse Split. The Series also may pay a second Reinvestment Dividend in
any year if necessary to avoid income or excise taxes. On or about the
Termination Date, the Series will liquidate its assets and will declare and make
a Termination Distribution to its shareholders in an aggregate amount equal to
the net proceeds of such liquidation after payment of the Series' expenses and
liabilities, including amounts payable on any outstanding borrowings by the
Series.

Due to tax considerations, the monthly Cash Dividend otherwise payable in
January for the Series normally is paid in two installments, each of which is in
the amount of approximately one-half of one month's dividend at a rate equal to
the Series' Target Return. The first installment is paid at the end of December,
with a record date in mid-December. The second installment is paid on the usual
schedule of the regular January dividend. Persons who become shareholders of

record after the mid-December record date, but before the record date of the
January dividend, receive the reduced January dividend, but do not receive the
first installment.

Shareholders of the Series that do not wish to receive Reinvestment
Dividends in additional Series Shares may affirmatively elect to receive any or
all Reinvestment Dividends in cash. To be effective with respect to any Shares
and any Reinvestment Dividend, such an affirmative election must be made by a
written notice, signed by each registered owner of the Shares (with signatures
guaranteed by an eligible institution acceptable to the Transfer Agent),
identifying the Shares as to which the Reinvestment Dividend is to be paid in
cash, and received by the Transfer Agent at least 30 days prior to the record
date for such Reinvestment Dividend.

Any election to receive Reinvestment Dividends with respect to particular
Shares in cash will be deemed to be an election by a shareholder to take all
subsequent Reinvestment Dividends with respect to such Shares in cash unless and
until such election is expressly revoked by notice to the Transfer Agent.
Shareholders that elect to receive Reinvestment Dividends in cash will not be
Reinvesting Shareholders. Because the investment

34
<PAGE>
objective of the Series is directed toward achieving the Target Return for, and
returning $10.00 per Targeted Share to, Reinvesting Shareholders, the Series'
management strongly recommends that all investors receive Reinvestment Dividends
in additional Shares. Non-Reinvesting Shareholders may not achieve, and should
not expect, the same investment results as Reinvesting Shareholders. See
'Investment Objectives and Policies.'

Shareholders not making such an affirmative election will receive
Reinvestment Dividends in additional Series Shares. There is no charge to
participants for reinvesting dividends. The Transfer Agent's fees for handling
the reinvestment of dividends will be paid by the Series. The automatic
reinvestment of Reinvestment Dividends will not relieve participants of any
income tax that may be payable thereon. See 'Taxation.'

REVERSE SPLITS. The Board currently intends to declare, at the time of the
declaration of any Reinvestment Dividend, a Reverse Split of the Series' Shares
that will cause the number of Shares held by Reinvesting Shareholders to remain
the same as before the Reinvestment Dividend, while reducing the number of
Shares held by shareholders who receive such dividends in cash. For example, if
the Series declares a Reinvestment Dividend of $0.10 per Share, and if at the
time such dividend is paid the Series has a net asset value of $10.00 per Share,
a Reinvesting Shareholder holding one Share of the Series would receive .01
additional Shares. At the same time, a 1.01-for-1 Reverse Split would be

declared, with the result that the Reinvesting Shareholder's holdings would be
consolidated back into one Share. The new Share held by that Reinvesting
Shareholder would have the same net asset value as the Share held immediately
prior to the payment of the Reinvestment Dividend. In the case of a shareholder
holding one Share of the Series who elects to receive the same Reinvestment
Dividend in cash, the number of Shares held by the shareholder would not
increase by reason of the Reinvestment Dividend and would be reduced by the
Reverse Split to approximately 0.99 Shares. The aggregate net asset value of the
Shares held by such a non-Reinvesting Shareholder would be reduced by an amount
equal to the cash amount paid to such non-Reinvesting Shareholder as a
Reinvestment Dividend.

A Reverse Split of the Series' Shares normally will result in
non-Reinvesting Shareholders holding odd-lots and fractional Shares of the
Series. Sale of odd lots generally involves the payment of higher commissions
than the sale of round lots. In addition, since it is not anticipated that there
will be any secondary market for fractional Shares, such non-Reinvesting
Shareholders' investment in the Series would have become illiquid to the extent
fractional Shares are held.

TAXATION

GENERAL. The Series intends to continue to qualify for treatment as a
regulated investment company ('RIC') under Subchapter M of the Internal Revenue
Code. In each taxable year that the Series so qualifies, the Series (but not its
shareholders) will be relieved of federal income tax on that part of its
investment company taxable income (consisting generally of net investment income
and any net short-term capital gain) and any net capital gain (the excess of net
long-term capital gain over net short-term capital loss) that is distributed to
its shareholders.

In order to continue to qualify for treatment as a RIC, the Series must
distribute annually to its shareholders at least 90% of its investment company
taxable income and must meet several additional requirements. These requirements
include the following: (1) the Series must derive at least 90% of its gross
income each taxable year from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of securities, or
other income (including gains from options or futures contracts) derived with
respect to its business of investing in securities ('Income Requirement'); (2)
the Series must derive less than 30% of its gross income each taxable year from
the sale or other disposition of securities, options or futures contracts that
were held for less than three months ('Short-Short Limitation'); (3) at the

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close of each quarter of the Series' taxable year, at least 50% of the value of
its total assets must be represented by cash and cash items, U.S. government
securities and other securities, with those other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the value of the

Series' total assets; and (4) at the close of each quarter of the Series'
taxable year, not more than 25% of the value of its total assets may be invested
in securities (other than U.S. government securities) of any one issuer.

Capital losses arising from the disposition of securities can be used only
to offset capital gains and cannot be used to reduce the Series' ordinary
income. Thus, if the Series sustains a net capital loss, the amount the Series
would be required to distribute in order to maintain its qualification for
treatment as a RIC would not be decreased. The Series would be able to utilize
such a capital loss only when, and to the extent that, it recognized capital
gain.

The Series will be subject to a nondeductible 4% excise tax to the extent
it fails to distribute by the end of any calendar year substantially all of its
ordinary income for that year and capital gain net income for the one-year
period ending on October 31 of that year, plus certain other amounts.

The Series may acquire zero coupon securities issued with original issue
discount. As the holder of such a security, the Series would have to include in
its gross income the original issue discount that accrues on the security for
the taxable year, even if the Series receives no payment on the security during
the year. Because the Series annually must distribute substantially all of its
investment company taxable income, including any original issue discount, in
order to continue to qualify for treatment as a RIC and to avoid imposition of
the 4% excise tax, the Series may be required in a particular year to distribute
as a dividend an amount that is greater than the total amount of cash the Series
actually receives. Those distributions will be made from the Series' cash assets
or from the proceeds of sales of portfolio securities, if necessary. The Series
may realize capital gains or losses from those sales, which would increase or
decrease the Series' investment company taxable income or net capital gain. In
addition, any such gains may be realized on the disposition of securities held
for less than three months. Because of the Short-Short Limitation, any such
gains would reduce the Series' ability to sell other securities, options or
futures contracts held for less than three months that it might wish to sell in
the ordinary course of its portfolio management.

DIVIDENDS. Dividends from the Series' investment company taxable income
(whether received in cash or in additional Shares) are taxable to shareholders
as ordinary income to the extent of the Series' earnings and profits. The
Series' capital gain dividends (i.e., distributions of the Series' net capital
gain) (whether received in cash or in additional Shares) are taxable to
shareholders as long-term capital gain, regardless of how long they have held
their Series Shares. Shareholders not subject to tax on their income generally
are not required to pay tax on amounts distributed to them.

Dividends declared by the Series in October, November or December of any
year and payable to shareholders of record on a date in any of those months will
be deemed to have been paid by the Series and received by the shareholders on
December 31 of that year if the dividends are paid by the Series during the
following January. Accordingly, those dividends will be taxed to shareholders
for the year in which that December 31 falls.

If the Series' Shares are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain dividends received on those shares. Investors
also should be aware that if Series Shares are purchased shortly before the
record date for any dividend, the shareholder will pay full price for the shares
and receive some portion of the price back as a taxable dividend.

The Series notifies its shareholders following the end of each calendar
year of the amounts of dividends paid (or deemed paid) to them during that year.

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REINVESTMENT DIVIDENDS. The declaration of a Reverse Split of Series
Shares will not result in the recognition of gain or loss to the shareholders of
the Series. However, the tax basis for each Series Share held by a Reinvesting
Shareholder prior to a Reinvestment Dividend and the related Reverse Split will,
in effect, be increased by the amount of the Reinvestment Dividend that is
attributable to that Share. Shareholders opting to receive Reinvestment
Dividends in cash will have the same tax basis for their Shares as before the
Reinvestment Dividend, but due to the related Reverse Split, those shareholders
will have a smaller number of Shares. To the extent that a shareholder's tax
basis for Series Shares exceeds the amount of the Termination Distribution (or
any sales proceeds) received by such shareholder, the shareholder will be
treated for tax purposes as having realized a long-term or short-term capital
loss. Such losses will be deductible by shareholders only to a limited extent.
Conversely, if a Termination Distribution received by a shareholder is greater
than such shareholder's tax basis for Shares of the Series, such shareholder
will be treated as having realized a long-term or short-term capital gain.

BACKUP WITHHOLDING. The Series is required to withhold 31% of all ordinary
and capital gain dividends and repurchase proceeds payable to any individuals
and certain other non-corporate shareholders who do not provide the Series with
a correct taxpayer identification number. Withholding at that rate from
dividends also is required for such shareholders who otherwise are subject to
backup withholding.

HEDGING AND RELATED INCOME STRATEGIES. The use of hedging and related
income strategies, such as selling and purchasing options and futures contracts,
involves complex rules that will determine for income tax purposes the character
and timing of recognition of the gains and losses the Series realizes in
connection therewith. Income from transactions in options and futures contracts
derived by the Series with respect to its business of investing in securities
will qualify as permissible income under the Income Requirement. However, income
from the disposition of options and futures will be subject to the Short-Short
Limitation if they are held for less than three months.

If the Series satisfies certain requirements, any increase in value of a
position that is part of a 'designated hedge' will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Series satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The
Series intends to qualify for this treatment for its hedging transactions. To
the extent the Series does not qualify for this treatment, it may be forced to
defer the closing out of certain options and futures contracts beyond the time
when it otherwise would be advantageous to do so, in order for the Series to
continue to qualify as a RIC.

The foregoing is only a summary of some of the important federal tax
considerations generally affecting the Series and its shareholders. In addition
to the considerations described above, which are applicable to any investment in
the Series, there may be other federal, state or local tax considerations
applicable to particular investors (especially categories of investors subject
to special rules, such as foreign investors). Prospective shareholders are
therefore urged to consult their tax advisers with respect to the tax
consequences to them of an investment in the Series.

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VALUATION OF SHARES

The net asset value of the Series' Shares is determined weekly as of the
close of regular trading on the New York Stock Exchange (currently 4:00 p.m.,
eastern time) on the second to last day of the week on which the Exchange is
open for trading or on such other day established by the Series' Board of
Directors. The net asset value of the Series' Shares is also determined monthly
as of the close of regular trading on the Exchange on the last day of the month
on which the Exchange is open for trading. The net asset value per share is
computed by dividing the value of the securities held by the Series plus any
cash or other assets (including interest and dividends accrued but not yet
received and earned discount) minus all liabilities (including accrued expenses)
by the total number of Series Shares outstanding at such time.

When market quotations are readily available, the Series' debt securities,
options and futures positions are valued based upon those quotations. Market
quotations generally are not available for options traded in the OTC market.
When market quotations for options and futures positions or any other securities
and assets of the Series are not readily available, they are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors. When market quotations are not readily available for any of the
Series' debt securities, such securities are valued based upon appraisals
received from a pricing service using a computerized matrix system, or based
upon appraisals derived from information concerning the security or similar
securities received from recognized dealers in those securities. Notwithstanding
the above, debt securities with maturities of 60 days or less generally are
valued at amortized cost if their original term to maturity was 60 days or less,
or by amortizing the difference between their fair value as of the 61st day
prior to maturity and their maturity value if their original term to maturity
exceeded 60 days, unless in either case the Board of Directors or its delegate
determines that this does not represent fair value.

Securities and other instruments which are listed on U.S. securities
exchanges and for which market quotations are readily available are valued at
the last sale price on the exchange on which the securities are traded, as of
the close of business on the day the securities are being valued or, lacking any
sales on such day, at the last bid price available. In cases where securities or
other instruments are traded on more than one exchange, such securities or other
instruments generally are valued on the exchange designated by MHII under the
direction of Mitchell Hutchins and the Series' Board of Directors as the primary
market. Securities traded in the OTC market and listed on NASDAQ are valued at
the last available sale price on NASDAQ prior to the time of valuation; other
OTC securities and instruments are valued at the last available bid price
available prior to the time of valuation. Securities and other assets for which
market quotations are not readily available (including restricted securities
subject to limitations as to their sale) are valued at fair value as determined
in good faith by or under the direction of the Board of Directors.

PORTFOLIO TRANSACTIONS

Subject to policies established by the Series' Boards of Directors, and
oversight by Mitchell Hutchins, MHII is responsible for the execution of
portfolio transactions and the allocation of brokerage transactions for the
Series. The government and corporate securities in which the Series invests
generally are traded on a 'net' basis without a stated commission, through
dealers acting for their own account and not as brokers. With respect to
portfolio securities traded on the OTC market, the Series engages primarily in
transactions with dealers unless a better price or execution could be obtained
by using a broker. Prices paid to dealers generally include a 'spread,' which is
the difference between the prices at which the dealer is willing to purchase and
sell a specific security at that time. In executing portfolio transactions, MHII
seeks to obtain the best net results for the Series, taking into account such
factors as the price (including the applicable brokerage commission or dealer

spread), size of the order, difficulty of execution and operational facilities
of the firm involved. While MHII generally seeks competitive commission rates,
payment of the lowest commission may

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not necessarily be consistent with obtaining the best net results. Since
inception the Series has not paid any brokerage commissions for securities
transactions.

In placing orders with brokers and dealers, MHII attempts to obtain the
best net price and the most favorable execution of its orders. Consistent with
applicable legal requirements and subject to approval by the Board of Directors,
MHII may seek to direct portfolio transactions in arrangements designed to
reduce the Series' operating expenses. MHII may, in its discretion, purchase and
sell portfolio securities to and from brokers and dealers who provide the Series
with research, analysis, statistical, pricing advice and similar services. MHII
may pay to those brokers, in return for such services, a higher commission than
would have been charged by other brokers, provided that MHII determines in good
faith that such commission is reasonable in terms either of that particular
transaction or of the overall responsibility of MHII to the Series and its other
clients and that the total commissions paid by the Series will be reasonable in
relation to the benefits to the Series over the long term. MHII will not pay a
higher price to dealers in principal transactions for the Series in return for
such services unless doing so is approved by the SEC and by the Series' Board of
Directors. Research services furnished by brokers or dealers through which or
with which the Series effects securities transactions may be used by MHII or
Mitchell Hutchins in advising other funds or accounts it advises and,
conversely, research services furnished to MHII or Mitchell Hutchins in
connection with other funds or accounts that MHII or Mitchell Hutchins advises
may be used in advising the Series. Although it is not possible to place a
dollar value on these services, it is the opinion of MHII that the receipt of
such services should not reduce its overall research expenses. Information and
research received from brokers and dealers will be in addition to, and not in
lieu of, the services required to be performed by Mitchell Hutchins and MHII
under the Contracts.

The Series has no obligation to deal with any broker or group of brokers in
the execution of portfolio transactions. The Series contemplates that,
consistent with obtaining the best net results, brokerage transactions may be
conducted through Mitchell Hutchins or any of its affiliates or those of MHII,
including PaineWebber. The Series' Board of Directors has adopted procedures in
conformity with Rule 17e-1 under the 1940 Act to ensure that all brokerage
commissions paid to Mitchell Hutchins, MHII or any of their affiliates are
reasonable and fair. Specific provisions in the Contracts authorize Mitchell
Hutchins, MHII and any of their affiliates which is a member of a national
securities exchange to effect portfolio transactions for the Series on such
exchange and to retain compensation in connection with such transactions. Any
such transactions will be effected and related compensation paid only in
accordance with applicable SEC regulations.

Transactions in futures contracts are executed through futures commission
merchants ('FCMs'), who receive brokerage commissions for their services. The
Series' procedures in selecting FCMs to execute its transactions in futures
contracts, including procedures permitting the use of Mitchell Hutchins and its
affiliates, are similar to those in effect with respect to brokerage
transactions in securities. For the fiscal years ended June 30, 1995, June 30,
1994 and June 30, 1993 the Series paid no commissions to FCMs.

Investment decisions for the Series and for other investment accounts
managed by MHII are made independently of each other in light of differing
considerations for the various accounts. The same investment decision, however,
may occasionally be made for the Series and one or more of such accounts. In
such cases, simultaneous transactions will be inevitable. Purchases or sales
then will be averaged as to price and allocated between the Series and such
other account(s) as to amount according to a formula deemed equitable to the
Series and such accounts. While in some cases this practice could have a
detrimental effect upon the price or value of the security as far as the Series
is concerned or upon its ability to complete its entire order, in other cases it
is believed that coordination and the ability to participate in volume
transactions will be beneficial to the Series.

The Series will not purchase securities that are offered in underwritings
in which either Mitchell Hutchins or MHII or any of their affiliates is a member
of the underwriting or selling group, except pursuant to the procedures adopted
by the Series' Board of Directors pursuant to Rule 10f-3 under the 1940 Act.

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<PAGE>
Among other things, these procedures will require that the commission or spread
paid in connection with such a purchase be reasonable and fair; that the
purchase be at not more than the public offering price prior to the end of the
first business day after the date of the public offering; and that Mitchell
Hutchins, MHII or their affiliates not participate in or benefit from the sale
to the Series.

For the fiscal years ended June 30, 1995, June 30, 1994 and June 30, 1993,
Mitchell Hutchins did not direct any portfolio transactions to brokers chosen
because they provide research and analysis.

DESCRIPTION OF THE SHARES

The Series is authorized to issue 100,000,000 Shares of its common stock,
$.001 par value. The Series' Shares have no preemptive, conversion, exchange or

redemption rights. Each Share has equal voting, dividend, distribution and
liquidation rights. The outstanding shares are fully paid and nonassessable.
Shareholders are entitled to one vote per share. All voting rights for the
election of directors are noncumulative, which means that the holders of more
than 50% of the Shares can elect 100% of the directors then nominated for
election if they choose to do so and, in such event, the holders of the
remaining shares will not be able to elect any directors. The foregoing
description and the description under 'Certain Anti-Takeover Provisions of the
Articles of Incorporation' are subject to the provisions contained in the
Series' Articles of Incorporation and Bylaws.

As of August 9, 1995, the Series had 4,245,649 Shares outstanding. No
Shares, other than those already outstanding, are offered for sale pursuant to
this Prospectus.

Any offerings of additional Shares of the Series, if made, will require
approval of its Board of Directors and will be subject to the requirements of
the 1940 Act that shares may not be sold at a price that is less than the
then-current net asset value of the Series.

The Series may purchase its Shares at market prices in the open market if
doing so is determined by its Board of Directors to be consistent with the
Series' investment objective.

CERTAIN ANTI-TAKEOVER PROVISIONS OF THE ARTICLES OF INCORPORATION. The
Series presently has provisions in its Articles of Incorporation that have the
effect of limiting: (1) the ability of other entities or persons to acquire
control of the Series; (2) the Series' freedom to engage in certain
transactions; or (3) the ability of the Series' directors or shareholders to
amend the Articles of Incorporation. These provisions of the Articles of
Incorporation may be regarded as 'anti-takeover' provisions. Under Maryland law
and the Series' Articles of Incorporation, the affirmative vote of the holders
of at least a majority of the votes entitled to be cast is required for the
consolidation of the Series with another corporation, a merger of the Series
with or into another corporation (except for certain mergers in which the Series
is the successor), a statutory share exchange in which the Series is not the
successor, a sale or transfer of all or substantially all of the Series' assets,
the dissolution of the Series (other than on its Termination Date) and any
amendment to the Series' Articles of Incorporation. In addition, the affirmative
vote of at least 66 2/3% (which is higher than that required under Maryland law
or the 1940 Act) of the outstanding shares is required generally to authorize
any of the following transactions or to amend the provisions of the Articles of
Incorporation relating to such transactions:

(1) merger, consolidation or statutory share exchange of the Series
with or into any other corporation;

(2) issuance of any securities of the Series to any person or entity
for cash;

(3) sale, lease or exchange of all or any substantial part of the
assets of the Series to any entity or person (except assets having an
aggregate market value of less than $1,000,000); or

(4) sale, lease or exchange to the Series, in exchange for securities
of the Series, of any assets of any entity or person (except assets having
an aggregate fair market value of less than $1,000,000); if such
corporation, person or entity is directly, or indirectly through
affiliates, the beneficial owner of more than

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<PAGE>
5% of the outstanding shares (a 'Principal Shareholder'). Such vote,
however, would not be required when, under certain conditions, the Board of
Directors approves the transaction, although in certain cases involving
merger, consolidation or statutory share exchange or sale of all or
substantially all of the Series' assets, the affirmative vote of a majority
of the outstanding shares would nevertheless be required. Reference is made
to the Articles of Incorporation of the Series, on file with the SEC, for
the full text of these provisions. See 'Further Information.'

The provisions of the Articles of Incorporation described above could have
the effect of depriving the owners of Shares of opportunities to sell their
shares at a premium over prevailing market prices by discouraging a third party
from seeking to obtain control of the Series in a tender offer or similar
transaction. The overall effect of these provisions is to render more difficult
the accomplishment of a merger or the assumption of control by a Principal
Shareholder. They provide, however, the advantage of potentially requiring
persons seeking control of the Series to negotiate with its management regarding
the price to be paid and facilitating the continuity of the Series' management,
investment objectives and policies. The Board of Directors of the Series has
considered the foregoing anti-takeover provisions and concluded that they are in
the best interests of the Series and its shareholders.

CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT AND REGISTRAR

State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as custodian of the Series' assets. PNC Bank,
National Association, whose principal business address is Broad and Chestnut
Streets, Philadelphia, Pennsylvania 19110, is the Series' transfer and dividend
disbursing agent and registrar.

LEGAL MATTERS

The law firm of Kirkpatrick & Lockhart LLP, 1800 M Street, N.W.,
Washington, D.C. 20036-5891, counsel to the Series, has passed upon the legality
of the Shares offered by this Prospectus. Kirkpatrick & Lockhart LLP also acts
as counsel to Mitchell Hutchins and PaineWebber in connection with other
matters.

REPORTS TO SHAREHOLDERS

The Series will send unaudited semi-annual and audited annual financial
statements of the Series to shareholders, including a list of the portfolio of
investments held by the Series.

INDEPENDENT AUDITORS

Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019, serves as
the Trust's independent auditors.

FURTHER INFORMATION

Further information concerning these securities and the Series may be found
in the Registration Statement of the Series of which this Prospectus constitutes
a part, on file with the SEC and to the Registration Statement of the Series
relating to the initial public offering of Series Shares, also on file with the
SEC.

FINANCIAL STATEMENTS

The Series' Annual Report to Shareholders for the fiscal year ended June
30, 1995, is a separate document supplied with this Prospectus and the financial
statements, accompanying notes and report of independent auditors appearing
therein are incorporated by reference in this Prospectus.

<PAGE>
APPENDIX A
HEDGING AND RELATED INCOME STRATEGIES

GENERAL DESCRIPTION OF HEDGING STRATEGIES. As discussed in the Prospectus,
MHII may use a variety of financial instruments ('Hedging Instruments'),
including options, futures contracts (sometimes referred to as 'futures'),
options on futures contracts and interest rate protection transactions, to
attempt to hedge the Series' portfolio. The Series also may use options to
attempt to enhance income and may use interest rate futures contracts ('futures
contracts' or 'futures') and options on futures contracts in other circumstances
permitted by the Commodity Futures Trading Commission ('CFTC').

Hedging strategies can be broadly categorized as 'short hedges' and 'long
hedges.' A short hedge is a purchase or sale of a Hedging Instrument intended
partially or fully to offset potential declines in the value of one or more
investments held in the Series' portfolio. Thus, in a short hedge the Series
takes a position in a Hedging Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged. For example, the
Series might purchase a put option on a security to hedge against a potential
decline in the value of that security. If the price of the security declined
below the exercise price of the put, the Series could exercise the put and thus
limit its loss below the exercise price to the premium paid plus transaction
costs. In the alternative, because the value of the put option can be expected
to increase as the value of the underlying security declines, the Series might
be able to close out the put option and realize a gain to offset the decline in
the value of the security.

Conversely, a long hedge is a purchase or sale of a Hedging Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that the Series intends to acquire. Thus, in a
long hedge the Series takes a position in a Hedging Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. For example, the Series might purchase a call option on
a security it intends to purchase in order to hedge against an increase in the
cost of the security. If the price of the security increased above the exercise
price of the call, the Series could exercise the call and thus limit its
acquisition cost to the exercise price plus the premium paid and transaction
costs. Alternatively, the Series might be able to offset the price increase by
closing out an appreciated call option and realizing a gain.

The Series may purchase and write (sell) covered straddles on securities or
bond indices. A long straddle is a combination of a call and a put option
purchased on the same security or on the same futures contract, where the
exercise price of the put is less than or equal to the exercise price of the
call. The Series would enter into a long straddle when MHII believes that it is
likely that interest rates will be more volatile during the term of the option

than the option pricing implies. A short straddle is a combination of a call and
a put written on the same security where the exercise price of the put is less
than or equal to the exercise price of the call. The Series would enter into a
short straddle when MHII believes that it is unlikely that interest rates will
be as volatile during the term of the options as the option pricing implies.

Hedging Instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that the Series owns or
intends to acquire. Hedging Instruments on bond indices, in contrast, generally
are used to hedge against price movements in broad fixed income market sectors
in which the Series has invested or expects to invest.

The use of Hedging Instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon which they are traded, the
CFTC and various state regulatory authorities. In addition, the Series' ability
to use Hedging Instruments will be limited by tax considerations. See
'Taxation.'

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In addition to the products, strategies and risks described below and
elsewhere in this Prospectus, Mitchell Hutchins and MHII expect to discover
additional opportunities in connection with options, futures contracts and other
hedging techniques. These new opportunities may become available as Mitchell
Hutchins or MHII develops new techniques, as regulatory authorities broaden the
range of permitted transactions and as new options, futures contracts or other
techniques are developed. Mitchell Hutchins or MHII may utilize these
opportunities to the extent that they are consistent with the Series' investment
objective and permitted by the Series' investment limitations and applicable
regulatory authorities.

SPECIAL RISKS OF HEDGING STRATEGIES. The use of Hedging Instruments
involves special considerations and risks, as described below. Risks pertaining
to particular Hedging Instruments are described in the sections that follow:

(1) Successful use of most Hedging Instruments depends upon MHII's ability
to predict movements of the overall securities and interest rate markets, which
requires different skills than predicting changes in the prices of individual
securities. While MHII is experienced in the use of Hedging Instruments, there
can be no assurance that any particular hedging strategy adopted will succeed.

(2) There might be imperfect correlation, or even no correlation, between
price movements of a Hedging Instrument and price movements of the investments
being hedged. For example, if the value of a Hedging Instrument used in a short
hedge increased by less than the decline in value of the hedged investment, the
hedge would not be fully successful. Such a lack of correlation might occur due
to factors unrelated to the value of the Investments being hedged, such as
speculative or other pressures on the markets in which Hedging Instruments are
traded. The effectiveness of hedges using Hedging Instruments on indices will

depend on the degree of correlation between price movements in the index and
price movements in the securities being hedged.

(3) Hedging strategies, if successful, can reduce risk of loss by wholly
or partially offsetting the negative effect of unfavorable price movements in
the investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if the Series entered in a
short hedge because MHII projected a decline in the price of a security in the
Series' portfolio, and the price of that security increased instead, the gain
from that increase might be wholly or partially offset by a decline in the price
of the Hedging Instrument. Moreover, if the price of the Hedging Instrument
declined by more than the increase in the price of the security, the Series
could suffer a loss. Similarly, transaction costs incurred in connection with a
Hedging Instrument can exceed the amount of the benefits received. In any such
case, the Series would have been in a better position had it not hedged at all.

(4) As described below, the Series might be required to maintain assets as
'cover,' maintain segregated accounts or make margin payments when it takes
positions in Hedging Instruments involving obligations to third parties (i.e.,
Hedging Instruments other than purchased options). If the Series were unable to
close out its positions in such Hedging Instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
position expired or matured. These requirements might impair the Series' ability
to sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that the Series sell a portfolio
security at a disadvantageous time. The Series' ability to close out a position
in a Hedging Instrument prior to expiration or maturity depends on the existence
of a liquid secondary market or, in the absence of such a market, the ability
and willingness of a contra party to enter into a transaction closing out the
position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to the Series.

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COVER FOR HEDGING STRATEGIES. Transactions using Hedging Instruments,
other than purchased options, will expose the Series to an obligation to another
party. The Series will not enter into any such transactions unless it owns
either (1) an offsetting ('covered') position in securities or other options or
futures contracts or (2) cash, receivables and short-term debt securities, with
a value sufficient at all times to cover its potential obligations to the extent
not covered as provided in (1) above. The Series will comply with SEC guidelines
regarding cover for hedging transactions and will, if the guidelines so require,
set aside cash, U.S. government securities or other liquid, high-grade debt
securities in a segregated account with its custodian in the prescribed amount.

Assets used as cover or held in a segregated account cannot be sold while

the position in the corresponding Hedging Instrument is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion of
the Series' assets to cover or segregated accounts could impede portfolio
management or the Series' ability to meet redemption requests or other current
obligations.

OPTIONS. The Series may purchase put and call options, and write covered
put and call options, on debt securities and bond indices. The purchase of call
options serves as a long hedge, and the purchase of put options serves as a
short hedge. Writing covered put options can enable the Series to enhance income
by reason of the premiums paid by the purchasers of such options. However, if
the market price of the underlying security declines to less than the exercise
price on the option, minus the premium received, the Series would expect to
suffer a loss. Writing covered call options serves as a limited short hedge,
because declines in the value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised, and the Series will be obligated
to sell the security at less than its market value. If the covered call option
is an OTC option, the securities or other assets used as cover would be
considered illiquid to the extent described under 'Investment Policies and
Restrictions--Illiquid Securities.'

The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Options that expire unexercised have no value.

The Series may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, the Series may
terminate its obligations under a call option that it had written by purchasing
an identical call option; that is known as a closing purchase transaction.
Conversely, the Series may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the Series to realize profits or
limit losses on an option position prior to its exercise or expiration.

The Series may purchase or write both exchange-traded and OTC options.
Exchange markets for options on debt securities exist but are relatively new,
and these instruments are primarily traded on the OTC market. Exchange-traded
options in the United States are issued by a clearing organization affiliated
with the exchange on which the option is listed which, in effect, guarantees
completion of every exchange-traded option transaction. In contrast, OTC options
are contracts between the Series and a contra party (usually a securities dealer
or a bank) with no clearing organization guarantee. Thus, when the Series
purchases or writes an OTC option, it relies on the party from whom it purchased

the option or to whom it has written the option (the 'contra party') to make or
take delivery of the underlying investment upon exercise of the option. Failure
by the contra party to do so would result in the loss of any premium paid by the
Series as well as the loss of any expected benefit of the transaction.

A-3
<PAGE>

Generally, the OTC debt options used by the Series will be European-style
options. This means that the option is only exercisable immediately prior to its
expiration. This is in contrast to American-style options, which are exercisable
at any time prior to the expiration date of the option.

The Series' ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Series intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the
Series will enter into OTC options only with contra parties that are expected to
be capable of entering into closing transactions with the Series, there is no
assurance that the Series will in fact be able to close out an OTC option
position at a favorable price prior to expiration. In the event of insolvency of
the contra party, the Series might be unable to close out an OTC option position
at any time prior to its expiration.

If the Series were unable to effect a closing transaction for an option it
had purchased it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by the Series could cause material losses because the Series would be
unable to sell the investment used as cover for the written option until the
option expires or is exercised.

GUIDELINE FOR OPTIONS ON SECURITIES. In view of the risks involved in
using the options strategies described above, the Series' Board of Directors has
determined that the Series may purchase a put or call option, including any
straddles or spreads, only if the value of its premium, when aggregated with the
premiums on all other options held by the Series, does not exceed 5% of the
Series' total assets. This guideline may be modified by the Board without
shareholder vote. Adoption of this guideline will not limit the percentage of
the Series' assets at risk to 5%.

FUTURES. The Series may purchase and sell interest rate futures contracts
and bond index futures contracts. The Series may also purchase put and call

options, and write covered put and call options, on futures in which they are
allowed to invest. The purchase of futures or call options thereon can serve as
a long hedge, and the sale of futures or the purchase of put options thereon can
serve as a short hedge. Writing covered call options on futures contracts can
serve as a limited short hedge, using a strategy similar to that used for
writing covered call options on securities or indices. Similarly, writing
covered put options on futures contracts can serve as a limited long hedge.

Futures strategies also can be used to manage the average duration of the
Series' portfolio. If MHII wishes to shorten the average duration of the Series,
the Series may sell a futures contract or a call option thereon, or purchase a
put option on that futures contract. If MHII wishes to lengthen the average
duration of the Series, the Series may buy a futures contract or a call option
thereon, or sell a put option.

The Series may also write put options on interest rate contracts while at
the same time purchasing call options on the same futures contracts in order
synthetically to create a long futures contract position. Such options would
have the same strike prices and expiration dates. The Series will engage in this
strategy only when it is more advantageous to the Series than is purchasing the
futures contract.

No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Series is required to deposit in a
segregated account with its custodian, in the name of the futures broker through
whom the transaction was effected, 'initial margin' consisting of cash, U.S.
government securities or other liquid, high-grade debt securities, in an amount
generally equal to 10% or less of the contract, in accordance with applicable
exchange rules. Unlike margin in securities transactions, initial margin on
futures contracts does not represent a borrowing, but rather is in the nature of
a performance bond or good-faith deposit that is returned to the Series at the
termination of the transaction if all contractual obligations have

A-4
<PAGE>
been satisfied. Under certain circumstances, such as periods of high volatility,
the Series may be required by an exchange to increase the level of its initial
margin payment, and initial margin requirements might be increased generally in
the future by regulatory action.

Subsequent 'variation margin' payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
'marking to market.' Variation margin does not involve borrowing, but rather
represents a daily settlement of the Series' obligations to or from a futures
broker. When the Series purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Series purchases

or sells a futures contract or writes a put or call option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If the Series has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.

Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The Series intends to enter into futures transactions only on exchanges or
boards of trade where there appears to be a liquid secondary market. However,
there can be no assurance that such a market will exist for a particular
contract at a particular time. Secondary markets for options on futures are
currently in the development stage, and the Series will not trade options on
futures on any exchange or board of trade unless, in MHII's opinion, the markets
for such options have developed sufficiently that the liquidity risks for such
options are not greater than the corresponding risks for futures.

Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.

If the Series were unable to liquidate a futures or related options
positions due to the absence of a liquid secondary market or the imposition of
price limits, it could incur substantial losses. The Series would continue to be
subject to market risk with respect to the position. In addition, except in the
case of purchased options, the Series would continue to be required to make
daily variation margin payments and might be required to maintain the position
being hedged by the future or option or to maintain cash or securities in a
segregated account.

Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments behind
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause

temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, 'program trading' and
other investment strategies might result in temporary price distortions.

A-5
<PAGE>

GUIDELINE FOR FUTURES AND RELATED OPTIONS. In view of the risks involved
in using the futures and options strategies that are described above, the
Series' Board of Directors has determined that the Series will not purchase or
sell futures contracts or related options if, immediately thereafter, the sum of
the amount of initial margin deposits on the Series' existing futures positions
and initial margin deposits and premiums paid for related options would exceed
5% of the Series' total assets. This guideline may be modified by the Board
without shareholder vote. For purposes of this guideline, options on futures
contracts traded on a commodities exchange are considered 'related options.'
Adoption of this guideline will not limit the percentage of the Series' assets
at risk to 5%.

The Fund may use the following hedging instruments:

OPTIONS ON DEBT SECURITIES. A call option is a short-term contract
pursuant to which the purchaser of the option, in return for a premium, has the
right to buy the security underlying the option at a specified price at any time
during the term of the option. The writer of the call option, who receives the
premium, has the obligation, upon exercise of the option during the option term
to deliver the underlying security against payment of the exercise price. A put
option is a similar contract that gives its purchaser, in return for a premium,
the right to sell the underlying security at a specified price during the option
term. The writer of the put option, who receives the premium, has the
obligation, upon exercise of the option during the option term, to buy the
underlying security at the exercise price.

OPTIONS ON BOND INDICES. A bond index assigns relative values to the debt
securities included in the index and fluctuates with changes in the market
values of those debt securities. A bond index option operates in the same way as
a more traditional option on a debt security, except that exercise of a bond
index option is effective with cash payment and does not involve delivery of
securities. Thus, upon exercise of a bond index option, the purchaser will
realize, and the writer will pay, an amount based on the difference between the
exercise price and the closing price of the bond index.

INTEREST RATE FUTURES CONTRACTS. Interest rate futures contracts are
bilateral agreements pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of a specified type of debt security at a
specified future time and at a specified price. Although such futures contracts
by their terms call for actual delivery or acceptance of debt securities, in
most cases the contracts are closed out before the settlement date without the
making or taking of delivery.

OPTIONS ON FUTURES CONTRACTS. Options on futures contracts are similar to
options on securities, except that an option on a futures contract gives the
purchaser the right, in return for the premium, to assume a position in a

futures contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell a security, at a
specified price at any time during the option term. Upon exercise of the option,
the delivery of the futures position to the holder of the option will be
accompanied by delivery of the accumulated balance that represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
future. The writer of an option, upon exercise, will assume a short position in
the case of a call and a long position in the case of a put.

BOND INDEX FUTURES CONTRACTS. A bond index futures contract is a bilateral
agreement pursuant to which one party agrees to accept, and the other party
agrees to make, delivery of an amount of cash equal to a specified dollar amount
times the difference between the bond index value at the close of trading of the
contract and the price at which the futures contract is originally struck. No
physical delivery of the debt securities comprising the index is made.
Generally, contracts are closed out prior to the expiration date of the
contract.

A-6
<PAGE>

INTEREST RATE PROTECTION TRANSACTIONS. The Series may enter into interest
rate protection transactions, including interest rate swaps and interest rate
caps, collars and floors. Interest rate swap transactions involve an agreement
between two parties to exchange payments that are based, respectively, on
variable and fixed rates of interest and that are calculated on the basis of a
specified amount of principal (the 'notional principal amount') for a specified
period of time. Interest rate cap and floor transactions involve an agreement
between two parties in which the first party agrees to make payments to the
counterparty when a designated market interest rate goes above (in the case of a
cap) or below (in the case of a floor) a designated level on predetermined dates
or during a specified time period. Interest rate collar transactions involve an
agreement between two parties in which the first party makes payments to the
counterparty when a designated market interest rate goes above a designated
level of predetermined dates or during a specified time period, and the
counterparty makes payments to the first party when a designated market interest
rate goes below a designated level on predetermined dates or during a specified
time period.

The Series expects to enter into interest rate protection transactions to
preserve a return or spread on a particular investment or portion of its
portfolio, to protect against any increase in the price of securities the Series
anticipates purchasing at a later date or to effectively fix the rate of
interest that it pays on one or more borrowings or series of borrowings. The
Series intends to use these transactions as a hedge and not as a speculative
investment.

The Series may enter into interest rate swaps, caps, collars and floors on
either an asset-based or liability-based basis, depending on whether it is

hedging its assets or its liabilities, and will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with the
Series receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these interest rate protection transactions are entered
into for good faith hedging purposes, and inasmuch as segregated accounts will
be established with respect to such transactions, MHII and the Series believe
such obligations do not constitute senior securities and, accordingly, will not
treat them as being subject to its borrowing restrictions. The net amount of the
excess, if any, of the Series' obligations over its entitlements with respect to
each interest rate swap will be accrued on a daily basis and an amount of cash,
U.S. government securities or other liquid high grade debt obligations having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by a custodian that satisfies the
requirements of the 1940 Act. The Series also will establish and maintain such
segregated accounts with respect to its total obligations under any interest
rate swaps that are not entered into on a net basis and with respect to any
interest rate caps, collars and floors that are written by the Series.

The Series will enter into interest rate protection transactions only with
banks and recognized securities dealers believed by MHII to present minimal
credit risks in accordance with guidelines established by the Series' board of
directors. If there is a default by the other party to such a transaction, the
Series will have to rely on its contractual remedies (which may be limited by
bankruptcy, insolvency or similar laws) pursuant to the agreements related to
the transaction.

The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. Caps, collars and floors are more
recent innovations for which documentation is less standardized, and
accordingly, they are less liquid than swaps.

A-7
<PAGE>
APPENDIX B

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ('MOODY'S') CORPORATE BOND
RATINGS

AAA. Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are protected by
a large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.

DESCRIPTION OF STANDARD & POOR'S CORPORATE DEBT RATINGS

AAA. Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS

PRIME-1. Issuers assigned this highest rating have a superior capacity for
repayment of senior short-term debt obligations. Prime-1 repayment capacity will
normally be evidenced by the following characteristics: leading market positions
in well established industries; high rates of return on funds employed;
conservative capitalization structures with moderate reliance on debt and ample
asset protection; broad margins in earnings coverage of fixed financial charges
and high internal cash generation; well established access to a range of
financial markets and assured sources of alternate liquidity.

DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS

A. Commercial paper issues assigned this highest rating are regarded as
having the greatest capacity for timely payment. Issues in this category are
delineated with the number 1, 2 and 3 to indicate the relative degree of safety.
A-1. This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.

B-1

<PAGE>
==============================================================================

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE SERIES OR PAINEWEBBER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING BY THE SERIES OR BY PAINEWEBBER IN ANY JURISDICTION
IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Series Expenses....................................................... 2
Prospectus Summary.................................................... 3
Financial Highlights.................................................. 10
The Series............................................................ 11
Investment Advisers................................................... 11
The Offering.......................................................... 11
Use of Proceeds....................................................... 11
Trading History....................................................... 12
Investment Objective and Policies..................................... 12
Special Considerations and Risk Factors............................... 21
Investment Limitations................................................ 26
Directors and Officers................................................ 28
Control Persons and Principal Holders of Securities................... 32
Management of the Series.............................................. 32
Dividends and Other Distributions; Reverse Splits..................... 34
Taxation.............................................................. 35
Valuation of Shares................................................... 38
Portfolio Transactions................................................ 38
Description of the Shares............................................. 40
Custodian, Transfer and Dividend Disbursing Agent and Registrar....... 41
Legal Matters......................................................... 41
Reports to Shareholders............................................... 41
Independent Auditors.................................................. 41
Further Information................................................... 41
Financial Statements.................................................. 41
Appendix A............................................................ A-1
Appendix B............................................................ B-1
</TABLE>

TRIPLE A AND GOVERNMENT

SERIES--1997, INC.

COMMON SHARES

-----------------------
PROSPECTUS
-----------------------

PAINEWEBBER INCORPORATED
------------------------

October , 1995

==============================================================================

[logo] Printed on recycled paper.

<PAGE>
PART C--OTHER INFORMATION

Item 24. Financial Statements and Exhibits

1. Financial Statements:
Included in Part A of the Registration Statement:

a. Financial Highlights

Included through incorporation by reference in Part B of the
Registration Statement and filed with the Annual Report to
Shareholders with the Securities and Exchange Commission on
August 29, 1995 [File No. 811-6656] [Accession No.
889812-95-000468]:

a. Report of Ernst & Young LLP, independent auditors

b. Portfolio of Investments as of June, 30, 1995

c. Statement of Assets and Liabilities as of June 30, 1995

d. Statement of Operations for the fiscal year ended June 30, 1995

e. Statement of Changes in Net Assets

f. Notes to Financial Statements

g. Quarterly Results of Operations (unaudited)

h. Financial Highlights

2. Exhibits:

a. (i) Articles of Incorporation(1)

(ii) Articles of Amendment(2)

b. (i) Bylaws (filed herewith)

(ii) Amendment to Bylaws dated May 28, 1992 (filed
herewith)

(iii) Amendment to Bylaws, dated September 28, 1994 (filed
herewith)

c. None

d. Inapplicable

e. None

f. None

g. (i) Investment Advisory and Administration Contract(3)

- -------------
(1) Incorporated herein by reference to exhibit 1 to the Registration
Statement on Form N-2 filed May 6, 1992 (File No. 33-47721).

(2) Incorporated herein by reference to exhibit 1(b) to Pre-Effective Amendment
No. 1 to the Registration Statement on Form N-2 filed June 10, 1992
(File No. 33-47721).

(3) Incorporated herein by reference to exhibit 6(a) to Pre-Effective Amendment
No. 2 to the Registration Statement on Form N-2 filed June 30, 1992
(File No. 33-47721).

II-1

<PAGE>
(ii) Sub-Advisory Contract(4)

h. None(5)

i. None

j. (i) Custodian Agreement(6)

(ii) Amendment to Custodian Agreement(7)

k. (i) Transfer Agency Agreement(8)

(ii) Amendment to Transfer Agency Agreement(9)

l. Opinion and Consent of Counsel(10)

m. None

n. Consent of Ernst & Young LLP, independent auditors (filed
herewith)

o. None

p. Letter of Investment Intent(11)

q. None

r. Financial Data Schedule (filed herewith)

Item 25. Marketing Arrangements

Inapplicable. See note accompanying Item 24.2.h.

- -------------

(4) Incorporated herein by reference to exhibit 6(b) to Pre-Effective Amendment
No. 2 to the Registration Statement on Form N-2 filed June 30, 1992
(File No. 33-47721).

(5) The shares offered by the Prospectus will be offered in order to effect
over-the-counter secondary market transactions by PaineWebber in its
capacity as a dealer and secondary market marker and not pursuant to any
agreement with the Series. Shares were originally issued in a public
offering pursuant to a Distribution Contract, included as exhibit 7(a) to
Pre-Effective Amendment No. 2 to the Registration Statement on
Form N-2 filed June 30, 1992 (File No. 33-47721).

(6) Incorporated herein by reference to exhibit 9(a) to Pre-Effective Amendment
No. 2 to the Registration Statement on Form N-2 filed June 30, 1992
(File No. 33-47721).

(7) Incorporated herein by reference to exhibit 9(c) to Pre-Effective Amendment
No. 1 to the Registration Statement on Form N-2 filed October 2, 1992
(File No. 33-50996).

(8) Incorporated herein by reference to exhibit 9(b) to the Initial
Registration Statement on Form N-2 filed June 30, 1992 (File No. 33-47721).

(9) Incorporated herein by reference to exhibit k(ii) to Post-Effective
Amendment No. 1 to the Registration Statement on Form N-2 filed
October 19, 1993 (File No. 33-50996).

(10) Incorporated herein by reference to exhibit 11 to Pre-Effective Amendment
No. 1 to the Registration Statement on Form N-2 filed October 2, 1992
(File No. 33-50996).

(11) Incorporated herein by reference to exhibit 14 to Pre-Effective Amendment
No. 2 to the Registration Statement on Form N-2 filed June 30, 1992
(File No. 33-47721).

II-2

<PAGE>

Item 26. Other Expenses of Issuance and Distribution

Not applicable to current Post-Effective Amendment; for expenses
incurred in connection with this Registration Statement; see
Pre-Effective Amendment No. 1 to the Series Registration Statement on
Form N-2, SEC File No. 33-50996, filed October 2, 1992.

Item 27. Persons Controlled by or Under Common Control

None.

Item 28. Number of Holders of Securities

Number of Record
Holders as of
August 2, 1995

Title of Class
- --------------

Common Stock, par value 17
$0.001 per share

Item 29. Indemnification

Incorporated by reference to Item 3 of Part C to Pre-Effective
Amendment No. 1 to the Series' Registration Statment on Form N-2 filed
October 2, 1992 (File No. 33-50996).

Item 30. Business and Other Connections of Investment Adviser

See "Investment Advisers" in the Prospectus.

Mitchell Hutchins, a Delaware Corporation, is a registered
investment adviser and is wholly owned by PaineWebber, which in turn is
wholly owned by Paine Webber Group Inc. Mitchell Hutchins is primarily
engaged in the investment advisory business. Information as to executive
officers and directors of Mitchell Hutchins is included in its Form ADV
filed on August 17, 1995 with the SEC (Registration number 801-13219)
and is incorporated herein by reference.

MHII, a Delaware Corporation, is a registered investment
adviser and is wholly owned by Mitchell Hutchins. MHII is primarily
engaged in the investment advisory business. Information as to officers
and directors of MHII is included in its Form ADV filed on March 31,
1995 with the SEC (Registration number 801-20378) and is incorporated
herein by reference.

Item 31. Location of Accounts and Records

The accounts and records of the Registrant are maintained at
the office of the Registrant's custodian at One Heritage Drive, North
Quincy, Massachusetts 02171, except that the Registrant's corporate
records (its articles of incorporation, by-laws and minutes of its board
of directors and stockholders) are maintained at the offices of Mitchell
Hutchins at 1285 Avenue of the Americas, New York, New York 10019.

Item 32. Management Services

None.

Item 33. Undertakings

The Registrant hereby undertakes:

(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this registration
statement:

(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933:

II-3

<PAGE>

(ii) To reflect in the prospectus any facts or
events arising after the effective date of
the registration statement (or the most recent
post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change
in the information set forth in the registration
statement; and

(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement.

(2) That for the purpose of determining any liability under
the Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the registrant
pursuant to Rule 42(b)(1) or (4) or 497 under the Securities Act shall be
deemed to be part of this registration statement as of the time it was

declared effective.

(3) That for the purpose of determining any liability
under the Securities Act of 1933, each post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.

(4) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.

(5) To send by first class mail or other means designed to
ensure equally prompt delivery, within two business days of receipt of a
written or oral request, any Statement of Additional Information.

II-4

<PAGE>

POWER OF ATTORNEY

I, John R. Torell III, Director of Triple A and Government Series--1997,
Inc. ("Series"), hereby constitute and appoint Victoria E. Schonfeld,
Dianne E. O'Donnell, Gregory K. Todd, Arthur J. Brown, Elinor W. Gammon
and Robert A. Wittie, and each of them singly, my true and lawful
attorneys, with full power to them to sign for me, and in my capacity as
Director for the Series, any and all amendments to the registration
statement of the Series, and all instruments necessary or desirable in
connection therewith, filed with the Securities and Exchange Commission,
hereby ratifying and confirming my signature as it may be signed by said
attorneys to any and all amendments to said registration statement.

Pursuant to the requirements of the Securities Act of 1933, this
instrument has been signed below by the following in the capacity and on
the date indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John R. Torell III Director 8.25.95
- ----------------------
John R. Torell III
</TABLE>

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
New York, and the State of New York, on the 25th day of August, 1995.

TRIPLE A AND GOVERNMENT SERIES--1997, INC.

By:________________________________________
Gregory K. Todd
Vice President

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed
below by the following persons in the capacities and on the dates
indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Director and Chairman of
- ------------------------ the Board of Directors
E. Garrett Bewkes, Jr.*

/s/ JOHN R. TORELL III Director 8.25.95
- ------------------------
John R. Torell III

Director
- ------------------------
William D. White**

President (Chief Executive
- ------------------------ Officer)
Margo N. Alexander***

Vice President and Treasurer
- ------------------------ (Principal Financial and
Julian F. Sluyters Accounting Officer)
</TABLE>

- --------------

* Signature affixed by Robert A. Wittie pursuant to power of attorney
dated January 3, 1994, and incorporated by reference from Post-Effective
Amendment No. 20 to the Registration Statement of PaineWebber Masters
Series, Inc., SEC File No. 33-2524, filed February 28, 1994.

** Signature affixed by Robert A. Wittie pursuant to power of attorney
dated June 1, 1992, and incorporated by reference from Pre-Effective
Amendment No. 1 to the Series' Registration Statement on Form N-2, SEC
File No. 33-47721, filed June 10, 1992.

*** Signature affixed by Robert A. Wittie pursuant to power of attorney
dated May 8, 1995, and incorporated by reference from Post-Effective
Amendment No. 34 to the Registration Statement of PaineWebber America
Fund, SEC File No. 2-78626, filed May 10, 1995.

<PAGE>

SIGNATURES

TRIPLE A AND GOVERNMENT SERIES--1997, INC.

By: /s/ GREGORY K. TODD
--------------------------------------
Gregory K. Todd
Vice President

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ E. GARRETT BEWKES, JR. Director and Chairman of 8/25/95
- --------------------------------- the Board of Directors
E. Garrett Bewkes, Jr.*

Director
- ---------------------------------
John R. Torell III

/s/ WILLIAM D. WHITE Director 8/25/95
- ---------------------------------
William D. White**

/s/ MARGO N. ALEXANDER President (Chief 8/25/95
- --------------------------------- Executive Officer)
Margo N. Alexander***

/s/ JULIAN F. SLUYTERS Vice President and 8/25/95
- ---------------------------------- Treasurer (Principal
Julian F. Sluyters Financial and

Accounting Officer)
</TABLE>

- ------------------

<PAGE>
TRIPLE A AND GOVERNMENT SERIES - 1997, INC.
EXHIBIT INDEX

Sequential
Page
Exhibit Document Description Number
- ------- -------------------- ----------
a. (i) Articles of Incorporation [previously filed
as exhibit 1 to the Registration Statement on
Form N-2 filed May 6, 1992 (File No. 33-47721)]

(ii) Articles of Amendment [previously filed as exhibit
1(b) to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-2 filed June 10,
1992 (File No. 33-47721)]

b. (i) Bylaws (filed herewith)

(ii) Amendment to Bylaws dated May 28, 1992 (filed
herewith)

(iii) Amendment to Bylaws dated September 28, 1994 (filed
herewith)

c. None

d. Inapplicable

e. None

f. None

g. (i) Investment Advisory and Administration Contract
[previously filed as exhibit 6(a) to Pre-Effective
Amendment No. 2 to the Registration Statement on
Form N-2 filed June 30, 1992 (File No. 33-47721)]

(ii) Sub-Advisory Contract [previously filed as exhibit
6(b) to Pre-Effective Amendment No. 2 to the
Registration Statement on Form N-2 filed June 30,
1992 (File No. 33-47721)]

h. None

i. None

j. (i) Custodian Agreement [previously filed as exhibit 9(a)
to Pre-Effective Amendment No. 2 to the Registration
Statement on Form N-2 filed June 30, 1992 (File No.
33-47721)]

(ii) Amendment to Custodian Agreement [previously filed as
exhibit 9(c) to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-2 filed October 2,
1992 (File No. 33-50996)]

k. (i) Transfer Agency Agreement [previously filed as exhibit
9(b) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-2 filed June 30,
1992 (File No. 33-47721)]

(ii) Amendment to Transfer Agency Agreement [previously filed
as exhibit k(ii) to Post-Effective Amendment No. 1 to
the Registration Statement on Form N-2 filed October
1993 (File No. 33-50996)]

l. Opinion and consent of counsel [previously filed as
exhibit 11 to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-2 filed October 2,
1992 (File No. 33-50996)]

m. None

II-5

<PAGE>

n. Consent of Ernst & Young LLP, independent auditors
(filed herewith)

o. None

p. Letter of Investment Intent (previously filed as exhibit
14 to Pre-Effective Amendment No. 2 to the Registration
Statement on Form N-2 filed June 30, 1992 (File
No. 33-47721)]

q. None

r. Financial Data Schedule (filed herewith)

II-6

TRIPLE A GOVERNMENT SERIES - 1997, INC.

A Maryland Corporation

BYLAWS

May 1, 1992

TABLE OF CONTENTS

Page
----
ARTICLE I
NAME OF CORPORATION, LOCATION OF
OFFICES AND SEAL ............................................. 1
Section 1. Name ............................................. 1
Section 2. Principal Offices ................................ 1
Section 3. Seal ............................................. 1

ARTICLE II
STOCKHOLDERS ................................................. 1
Section 1. Annual Meetings .................................. 1
Section 2. Special Meetings ................................. 1
Section 3. Notice of Meetings ............................... 2
Section 4. Quorum and Adjournment of Meetings ............... 2
Section 5. Voting and Inspectors ............................ 2
Section 6. Validity of Proxies .............................. 3
Section 7. Stock Ledger and List of Stockholders ............ 3
Section 8. Action Without Meeting ........................... 4

ARTICLE III
BOARD OF DIRECTORS ........................................... 4
Section 1. Powers ........................................... 4
Section 2. Number and Term of Directors ..................... 4
Section 3. Election ......................................... 5
Section 4. Vacancies and Newly Created Directorships ........ 5
Section 5. Removal .......................................... 5
Section 6. Chairman of the Board ............................ 5
Section 7. Annual and Regular Meetings ...................... 6
Section 8. Special Meetings ................................. 6
Section 9. Waiver of Notice ................................. 6
Section 10. Quorum and Voting ................................ 6
Section 11. Action Without a Meeting ......................... 7
Section 12. Compensation of Directors ........................ 7

ARTICLE IV

COMMITTEES ................................................... 7
Section 1. Organization ..................................... 7
Section 2. Executive Committee .............................. 7
Section 3. Proceedings and Quorum ........................... 8
Section 4. Other Committees ................................. 8

ARTICLE V
OFFICERS ..................................................... 8
Section 1. General .......................................... 8
Section 2. Election, Tenure and Qualifications .............. 8
Section 3. Vacancies and Newly Created Officers ............. 8
Section 4. Removal and Resignation .......................... 9
Section 5. President ........................................ 9
Section 6. Vice President ................................... 9
Section 7. Treasurer and Assistant Treasurers ............... 9
Section 8. Secretary and Assistant Secretaries .............. 10

Section 9. Subordinate Officers ............................. 10
Section 10. Remuneration ..................................... 10
Section 11. Surety Bond ...................................... 11

ARTICLE VI
CAPITAL STOCK ................................................ 11
Section 1. Certificates of Stock ............................ 11
Section 2. Transfer of Shares ............................... 11
Section 3. Stock Ledgers .................................... 12
Section 4. Transfer Agents and Registrars ................... 12
Section 5. Fixing of Record Date ............................ 12
Section 6. Lost, Stolen or Destroyed Certificates ........... 12

ARTICLE VII
FISCAL YEAR AND ACCOUNTANT ................................... 13
Section 1. Fiscal Year ...................................... 13
Section 2. Accountant ....................................... 13

ARTICLE VIII
CUSTODY OF SECURITIES ........................................ 14
Section 1. Employment of a Custodian ........................ 14
Section 2. Termination of Custodian Agreement ............... 14
Section 3. Other Arrangements ............................... 14

ARTICLE IX
INDEMNIFICATION AND INSURANCE ................................ 14
Section 1. Indemnification of Officers, Directors, Employees
and Agents ...................................... 14
Section 2. Insurance of Officers, Directors, Employees
and Agents ...................................... 15
Section 3. Amendment ........................................ 15

ARTICLE X
AMENDMENTS ................................................... 15
Section 1. General .......................................... 15
Section 2. By Stockholders Only ............................. 15

BYLAWS

TRIPLE A GOVERNMENT SERIES - 1997, INC.

(A MARYLAND CORPORATION)

ARTICLE I

NAME OF CORPORATION, LOCATION OF
OFFICES AND SEAL

Section 1. Name. The name of the Corporation is Triple A Government
Series - 1997, Inc.

Section 2. Principal Offices. The principal office of the Corporation in
the State of Maryland shall be located in the City of Baltimore. The
Corporation may, in addition, establish and maintain such other offices
and places of business as the Board of Directors may, from time to time,
determine.

Section 3. Seal. The corporate seal of the Corporation shall be circular
in form and shall bear the name of the Corporation, the year of its
incorporation, and the word "Maryland." The form of the seal shall be
subject to alteration by the Board of Directors and the seal may be used
by causing it or a facsimile to be impressed or affixed or printed or
otherwise reproduced. Any officer or director of the Corporation shall
have authority to affix the corporate seal of the Corporation to any
document requiring the same.

ARTICLE II
STOCKHOLDERS

Section 1. Annual Meetings. There shall be no stockholders' meeting for
the election of directors and the transaction of other proper business
except as required by law or as hereinafter provided.

Section 2. Special Meetings. Special meetings of stockholders may be
called at any time by the Chairman of the Board, President, any Vice
President, or by a majority of the Board of Directors, and shall be held
at such time and place as may be stated in the notice of the meeting.

Special meetings of the stockholders may be called by the Secretary
upon the written request of the holders of shares entitled to not less
than twenty-five percent of all the votes entitled to be cast at such
meeting, provided that (1) such request shall state the purposes of such
meeting and the matters

proposed to be acted on, and (2) the stockholders requesting such
meeting shall have paid to the Corporation the reasonably estimated cost
of preparing and mailing the notice thereof, which the Secretary shall
determine and specify to such stockholders. No special meeting shall be
called upon the request of stockholders to consider any matter which is
substantially the same as a matter voted upon at any special meeting of
the stockholders held during the preceding twelve months, unless
requested by the holders of a majority of all shares entitled to be
voted at such meeting.

Section 3. Notice of Meetings. The Secretary shall cause notice of the
place, date and hour, and, in the case of a special meeting, the purpose
or purposes for which the meeting is called, to be mailed, postage
prepaid, not less than ten nor more than ninety days before the date of
the meeting, to each stockholder entitled to vote at such meeting at his
or her address as it appears on the records of the Corporation at the
time of such mailing. Notice shall be deemed to be given when deposited
in the United States mail addressed to the stockholders as aforesaid.
Notice of any stockholders' meeting need not be given to any stockholder
who shall sign a written waiver of such notice whether before or after
the time of such meeting, or to any stockholder who is present at such
meeting in person or by proxy. Notice of adjournment of a stockholders'
meeting to another time or place need not be given if such time and
place are announced at the meeting. Irregularities in the notice of any
meeting to, or the nonreceipt of any such notice by, any of the
stockholders shall not invalidate any action otherwise properly taken by
or at any such meeting.

Section 4. Quorum and Adjournment of Meetings. The presence at any
stockholders' meeting, in person or by proxy, of stockholders entitled
to cast a majority of the votes shall be necessary and sufficient to
constitute a quorum for the transaction of business. In the absence of a
quorum, the holders of a majority of shares entitled to vote at the
meeting and present in person or by proxy, or, if no stockholder
entitled to vote is present in person or by proxy, any officer present
entitled to preside or act as secretary of such meeting may adjourn the
meeting without determining the date of the new meeting or from time to
time without further notice to a date not more than 120 days after the
original record date. Any business that might have been transacted at
the meeting originally called may be transacted at any such adjourned
meeting at which a quorum is present.

Section 5. Voting and Inspectors. At each stockholders' meeting, each
stockholder shall be entitled to one vote for each share of stock of the
Corporation validly issued and outstanding and standing in his or her
name on the books of the Corporation on the record date fixed in
accordance with Section 5 of Article VI hereof, either in person or by
proxy appointed by instrument

- 2 -

in writing subscribed by such stockholder or his or her duly authorized
attorney, except that no shares held by the Corporation shall be
entitled to a vote. If no record date has been fixed, the record date

for the determination of stockholders entitled to notice of or to vote
at a meeting of stockholders shall be the later of the close of business
on the day on which notice of the meeting is mailed or the thirtieth
day before the meeting, or, if notice is waived by all stockholders, at
the close of business on the tenth day next preceding the day on which
the meeting is held.

Except as otherwise specifically provided in the Articles of
Incorporation or these Bylaws or as required by provisions of the 1940
Act, all matters shall be decided by a vote of the majority of the votes
validly cast. The vote upon any question shall be by ballot whenever
requested by any person entitled to vote, but, unless such a request is
made, voting may be conducted in any way approved by the meeting.

At any meeting at which there is an election of Directors, the
chairman of the meeting may, and upon the request of the holders of ten
percent of the stock entitled to vote at such election shall, appoint
two inspectors of election who shall first subscribe an oath or
affirmation to execute faithfully the duties of inspectors at such
election with strict impartiality and according to the best of their
ability, and shall, after the election, make a certificate of the result
of the vote taken. No candidate for the office of Director shall be
appointed as an inspector.

Section 6. Validity of Proxies. The right to vote by proxy shall exist
only if the instrument authorizing such proxy to act shall have been
signed by the stockholder or by his or her duly authorized attorney.
Unless a proxy provides otherwise, it shall not be valid more than
eleven months after its date. All proxies shall be delivered to the
Secretary of the Corporation or to the person acting as Secretary of the
meeting before being voted, who shall decide all questions concerning
qualification of voters, the validity of proxies, and the acceptance or
rejection of votes. If inspectors of election have been appointed by the
chairman of the meeting, such inspectors shall decide all such
questions. A proxy with respect to stock held in the name of two or more
persons shall be valid if executed by one of them unless at or prior to
exercise of such proxy the Corporation receives a specific written
notice to the contrary from any one of them. A proxy purporting to
be executed by or on behalf of a stockholder shall be deemed valid
unless challenged at or prior to its exercise.

Section 7. Stock Ledger and List of Stockholders. It shall be the duty
of the Secretary or Assistant Secretary of the Corporation to cause an
original or duplicate stock ledger to be

- 3 -

maintained at the office of the Corporation's transfer agent. Such stock
ledger may be in written form or any other form capable of being
converted into written form within a reasonable time for visual
inspection. Any one or more persons, each of whom has been a stockholder
of record of the Corporation for more than six months next preceding
such request, who owns in the aggregate 5% or more of the outstanding
capital stock of the Corporation, may submit (unless the Corporation at

the time of the request maintains a duplicate stock ledger at its
principal office in Maryland) a written request to any officer of the
Corporation or its resident agent in Maryland for a list of the
stockholders of the Corporation. Within 20 days after such a request,
there shall be prepared and filed at the Corporation's principal office
in Maryland a list containing the names and addresses of all
stockholders of the Corporation and the number of shares of each class
held by each stockholder, certified as correct by an officer of the
Corporation, by its stock transfer agent, or by its registrar.

Section 8. Action Without Meeting. Any action required or permitted to
be taken by stockholders at a meeting of stockholders may be taken
without a meeting if (1) all stockholders entitled to vote on the matter
consent to the action in writing, (2) all stockholders entitled to
notice of the meeting but not entitled to vote at it sign a written
waiver of any right to dissent, and (3) the consents and waivers are
filed with the records of the meetings of stockholders. Such consent
shall be treated for all purposes as a vote at the meeting.

ARTICLE III
BOARD OF DIRECTORS

Section 1. Powers. Except as otherwise provided by operation of law, by
the Articles of Incorporation, or by these Bylaws, the business and
affairs of the Corporation shall be managed under the direction of and
all the powers of the Corporation shall be exercised by or under
authority of its Board of Directors.

Section 2. Number and Term of Directors. Except for the initial Board of
Directors, the Board of Directors shall consist of not fewer than three
nor more than fifteen Directors, as specified by a resolution of a
majority of the entire Board of Directors and at least one member of the
Board of Directors shall be a person who is not an "interested person" of
the Corporation, as that term is defined in the 1940 Act. All other
directors may be interested persons of the Corporation if the
requirements of Section 10(d) of the 1940 Act are met by the Corporation
and its investment adviser. Directors need not be stockholders of the
Corporation. All acts done at any meeting of the Directors or by any
person acting as a Director, so long as his or her successor shall not
have been duly elected or appointed, shall,

-4-

notwithstanding that it be afterwards discovered that there was some
defect in the election of the Directors or of such person acting as a
Director or that they or any of them were disqualified, be as valid as
if the Directors or such other person, as the case may be, had been duly
elected and were or was qualified to be Directors or a Director of the
Corporation. Each Director shall hold office until his or her successor
is elected and qualified or until his or her earlier death, resignation
or removal.

Section 3. Election. At the first annual meeting of stockholders,
Directors shall be elected by vote of the holders of a majority of the

shares present in person or by proxy and entitled to vote thereon.
Thereafter, except as otherwise provided in these Bylaws, the Directors
shall be elected by the stockholders at a meeting held on a date fixed
by the Board of Directors. A plurality of all the votes cast at a
meeting at which a quorum is present is sufficient to elect a Director.

Section 4. Vacancies and Newly Created Directorships. If any vacancies
shall occur in the Board of Directors by reason of death, resignation,
removal or otherwise, or if the authorized number of Directors shall be
increased, the Directors then in office shall continue to act, and such
vacancies (if not previously filled by the stockholders) may be filled
by a majority of the Directors then in office, although less than a
quorum, except that a newly created Directorship may be filled only by a
majority vote of the entire Board of Directors; provided, however, that
immediately after filling such vacancy, at least two-thirds (2/3) of the
Directors then holding office shall have been elected to such office by
the stockholders of the Corporation. In the event that at any time,
other than the time preceding the first annual stockholders' meeting,
less than a majority of the Directors of the Corporation holding office
at that time were elected by the stockholders, a meeting of the
stockholders shall be held promptly and in any event within sixty days
for the purpose of electing Directors to fill any existing vacancies in
the Board of Directors, unless the Securities and Exchange Commission
shall by order extend such period.

Section 5. Removal. At any stockholders' meeting duly called, provided a
quorum is present, the stockholders may remove any Director from office
(either with or without cause) and may elect a successor or successors
to fill any resulting vacancies for the unexpired terms of the removed
Director or Directors. A majority of all votes represented at a meeting
is sufficient to remove a Director for cause.

Section 6. Chairman of the Board. The Board of Directors may, but shall
not be required to, elect a Chairman of the Board. Any Chairman of the
Board shall be elected from among the Directors of the Corporation and
may hold such office only so long as he or

-5-

she continues to be a Director. The Chairman, if any, shall preside at
all stockholders' meetings and at all meetings of the Board of
Directors, and may be ex officio a member of all committees of the Board
of Directors. The Chairman, if any, shall have such powers and perform
such duties as may be assigned from time to time by the Board of
Directors.

Section 7. Annual and Regular Meetings. The annual meeting of the Board
of Directors for choosing officers and transacting other proper business
shall be held at such other time and place as the Board may determine.
The Board of Directors from time to time may provide by resolution for
the holding of regular meetings and fix their time and place within or
outside the State of Maryland. Except as otherwise provided in the 1940
Act, notice of such annual and regular meetings need not be given,
provided that notice of any change in the time or place of such meetings

shall be sent promptly to each Director not present at the meeting at
which such change was made, in the manner provided for notice of special
meetings. Except as otherwise provided under the 1940 Act, members of
the Board of Directors or any committee designated thereby may
participate in a meeting of such Board or committee by means of a
conference telephone or similar communications equipment that allows all
persons participating in the meeting to hear each other at the same
time.

Section 8. Special Meetings. Special meetings of the Board of Directors
shall be held whenever called by the Chairman of the Board, the
President (or, in the absence or disability of the President, by any
Vice President), the Treasurer or by two or more Directors, at the time
and place (within or without the State of Maryland) specified in the
respective notice or waivers of notice of such meetings. Notice of
special meetings, stating the time and place, shall be (1) mailed to
each Director at his or her residence or regular place of business at
least three days before the day on which a special meeting is to be held
or (2) delivered to him or her personally or transmitted to him or her
by telegraph, telefax, telex, cable or wireless at least one day before
the meeting.

Section 9. Waiver of Notice. No notice of any meeting need be given to
any Director who is present at the meeting or who waives notice of such
meeting in writing (which waiver shall be filed with the records of
such meeting), either before or after the time of the meeting.

Section 10. Quorum and Voting. At all meetings of the Board of
Directors, the presence of one half or more of the number of Directors
then in office shall constitute a quorum for the transaction of
business, provided that there shall be present at least two directors.
In the absence of a quorum, a majority of the Directors present may
adjourn the meeting, from time to time, until a quorum shall be present.
The action of a majority of the

-6-

Directors present at a meeting at which a quorum is present shall be the
action of the Board of Directors, unless concurrence of a greater
proportion is required for such action by law, by the Articles of
Incorporation or by these Bylaws.

Section 11. Action Without a Meeting. Except as otherwise provided under
the 1940 Act, any action required or permitted to be taken at any
meeting of the Board of Directors or of any committee thereof may be
taken without a meeting if a written consent to such action is signed by
all members of the Board or of such committee, as the case may be, and
such written consent is filed with the minutes of proceedings of the
Board or committee.

Section 12. Compensation of Directors. Directors shall be entitled to
receive such compensation from the Corporation for their services as may
from time to time be determined by resolution of the Board of Directors.

ARTICLE IV
COMMITTEES

Section 1. Organization. By resolution adopted by the Board of
Directors, the Board may designate one or more committees of the Board
of Directors, including an Executive Committee. The Chairman of such
committees shall be elected by the Board of Directors. Each committee
must be comprised of two or more members, each of whom must be a
Director and shall hold committee membership at the pleasure of the
Board. The Board of Directors shall have the power at any time to change
the members of such committees and to fill vacancies in the committees.
The Board may delegate to these committees any of its powers, except the
power to declare a dividend or distribution on stock, authorize the
issuance of stock, recommend to stockholders any action requiring
stockholders' approval, amend these Bylaws, approve any merger or share
exchange which does not require stockholder approval, approve or
terminate any contract with an "investment adviser" or "principal
underwriter," as those terms are defined in the 1940 Act, or to take any
other action required by the 1940 Act to be taken by the Board of
Directors.

Section 2. Executive Committee. Unless otherwise provided by
resolution of the Board of Directors, when the Board of Directors is not
in session, the Executive Committee, if one is designated by the Board,
shall have and may exercise all powers of the Board of Directors in the
management of the business and affairs of the Corporaton that may
lawfully be exercised by an Executive Committee. The President shall
automatically be a member of the Executive Committee.

-7-

Section 3. Proceedings and Quorum. In the absence of an appropriate resolution
of the Board of Directors, each committee may adopt such rules and regulations
governing its proceedings, quorum and manner of acting as it shall deem proper
and desirable. In the event any member of any committee is absent from any
meeting, the members thereof present at the meeting, whether or not they
constitute a quorum, may appoint a member of the Board of Directors to act in
the place of such absent member.

Section 4. Other Committees. The Board of Directors may appoint other
committees, each consisting of one or more persons, who need not be
Directors. Each such committee shall have such powers and perform such
duties as may be assigned to it from time to time by the Board of
Directors, but shall not exercise any power which may lawfully be
exercised only by the Board of Directors or a committee thereof.

ARTICLE V
OFFICERS

Section 1. General. The officers of the Corporation shall be a
President, a Secretary, and a Treasurer, and may include one or more
Vice Presidents, Assistant Secretaries or Assistant Treasurers, and such
other officers as may be appointed in accordance with the provisions of
Section 9 of this Article.

Section 2. Election, Tenure and Qualifications. The officers of the
Corporation, except those appointed as provided in Section 9 of this
Article V, shall be elected by the Board of Directors at its first
meeting or such subsequent meetings as shall be held prior to its first
annual meeting, and thereafter annually at its annual meeting. If any
officers are not elected at any annual meeting, such officers may be
elected at any subsequent regular or special meeting of the Board. Except
as otherwise provided in this Article V, each officer elected by the
Board of Directors shall hold office until the next annual meeting of
the Board of Directors and until his or her successor shall have been
elected and qualified. Any person may hold one or more offices of the
Corporation except that no one person may serve concurrently as both
President and Vice President. A person who holds more than one office in
the Corporation may not act in more than one capacity to execute,
acknowledge, or verify an instrument required by law to be executed,
acknowledged, or verified by more than one officer. No officer need be a
Director.

Section 3. Vacancies and Newly Created Officers. If any vacancy shall
occur in any office by reason of death, resignation, removal,
disqualification or other cause, or if any new office shall be created,
such vacancies or newly created offices may be filled by the Board of
Directors at any regular or special meeting or, in the case of any
office created pursuant to Section

- 8 -

9 hereof, by any officer upon whom such power shall have been
conferred by the Board of Directors.

Section 4. Removal and Resignation. Any officer may be removed from
office by the vote of a majority of the members of the Board of
Directors given at a regular meeting or any special meeting called for
such purpose, if the Board has determined the best interests of the
Corporation will be served by removal of that officer. Any officer may
resign from office at any time by delivering a written resignation to
the Board of Directors, the President, the Secretary, or any Assistant
Secretary. Unless otherwise specified therein, such resignation shall
take effect upon delivery.

Section 5. President. The President shall be the chief executive officer
of the Corporation and, in the absence of the Chairman of the Board or
if no Chairman of the Board has been elected, shall preside at all
stockholders' meetings and at all meetings of the Board of Directors and
shall in general exercise the powers and perform the duties of the
Chairman of the Board. Subject to the supervision of the Board of
Directors, the President shall have general charge of the business,
affairs and property of the Corporation and general supervision over its
officers, employees and agents. Except as the Board of Directors may
otherwise order, the President may sign in the name and on behalf of the
Corporation all deeds, bonds, contracts, or agreements. The President
shall exercise such other powers and perform such other duties as from
time to time may be assigned by the Board of Directors.

Section 6. Vice President. The Board of Directors may from time to time
elect one or more Vice Presidents who shall have such powers and perform
such duties as from time to time may be assigned to them by the Board of
Directors or the President. At the request of, or in the absence or in
the event of the disability of, the President, the Vice President (or,
if there are two or more Vice Presidents, then the senior of the Vice
Presidents present and able to act) may perform all the duties of the
President and, when so acting, shall have all the powers of and be
subject to all the restrictions upon the President.

Section 7. Treasurer and Assistant Treasurers. The Treasurer shall be
the principal financial and accounting officer of the Corporation and
shall have general charge of the finances and books of account of the
Corporation. Except as otherwise provided by the Board of Directors, the
Treasurer shall have general supervision of the funds and property of
the Corporation and of the performance by the Custodian of its duties
with respect thereto. The Treasurer shall render to the Board of
Directors, whenever directed by the Board, an account of the financial
condition of the Corporation and of all transactions as Treasurer; and
as soon as possible after the close of each

- 9 -

financial year the Treasurer shall make and submit to the Board of
Directors a like report for such financial year. The Treasurer shall
perform all acts incidental to the office of Treasurer, subject to the
control of the Board of Directors.

Any Assistant Treasurer may perform such duties of the Treasurer as
the Treasurer or the Board of Directors may assign, and, in the absence
of the Treasurer, may perform all the duties of the Treasurer.

Section 8. Secretary and Assistant Secretaries. The Secretary shall
attend to the giving and serving of all notices of the Corporation and
shall record all proceedings of the meetings of the stockholders and
Directors in books to be kept for that purpose. The Secretary shall keep
in safe custody the seal of the Corporation, and shall have
responsibility for the records of the Corporation, including the stock
books and such other books and papers as the Board of Directors may
direct and such books, reports, certificates and other documents
required by law to be kept, all of which shall at all reasonable times
be open to inspection by any Director. The Secretary shall perform such
other duties which appertain to this office or as may be required by the
Board of Directors.

Any Assistant Secretary may perform such duties of the Secretary as
the Secretary or the Board of Directors may assign, and, in the absence
of the Secretary, may perform all the duties of the Secretary.

Section 9. Subordinate Officers. The Board of Directors from time to
time may appoint such other officers and agents as it may deem
advisable, each of whom shall have such title, hold office for such
period, have such authority and perform such duties as the Board of

Directors may determine. The Board of Directors from time to time may
delegate to one or more officers or agents the power to appoint any such
subordinate officers or agents and to prescribe their respective rights,
terms of office, authorities and duties. Any officer or agent appointed
in accordance with the provisions of this Section 9 may be removed,
either with or without cause, by any officer upon whom such power of
removal shall have been conferred by the Board of Directors.

Section 10. Remuneration. The salaries or other compensation of the
officers of the Corporation shall be fixed from time to time by
resolution of the Board of Directors in the manner provided by Section
10 of Article III, except that the Board of Directors may by resolution
delegate to any person or group of persons the power to fix the salaries
or other compensation of any subordinate officers or agents appointed in
accordance with the provisions of Section 9 of this Article V.

- 10 -

Section 11. Surety Bond. The Board of Directors may require any
officer or agent of the Corporation to execute a bond (including,
without limitation, any bond required by the 1940 Act and the rules and
regulations of the Securities and Exchange Commission promulgated
thereunder) to the Corporation in such sum and with such surety or
sureties as the Board of Directors may determine, conditioned upon the
faithful performance of his or her duties to the Corporation, including
responsibility for negligence and for the accounting of any of the
Corporation's property, funds or securities that may come into his or
her hands.

ARTICLE VI
CAPITAL STOCK

Section 1. Certificates of Stock. The interest of each stockholder of
the Corporation shall be evidenced by certificates for shares of stock
in such form as the Board of Directors may from time to time authorize,
provided, however, the Board of Directors may, in its discretion,
authorize the issuance of non-certificated shares. No certificate shall
be valid unless it is signed by the President or a Vice President and
countersigned by the Secretary or an Assistant Secretary or the
Treasurer or an Assistant Treasurer of the Corporation and sealed with
the seal of the Corporation, or bears the facsimile signatures of such
officers and a facsimile of such seal. In case any officer who shall
have signed any such certificate, or whose facsimile signature has been
placed thereon, shall cease to be such an officer (because of death,
resignation or otherwise) before such certificate is issued, such
certificate may be issued and delivered by the Corporation with the same
effect as if he or she were such officer at the date of issue.

In the event that the Board of Directors authorizes the issuance of
non-certificated shares of stock, the Board of Directors may, in its
discretion and at any time, discontinue the issuance of share
certificates and may, by written notice to the registered owners of each
certificated share, require the surrender of share certificates to the

Corporation for cancellation. Such surrender and cancellation shall not
affect the ownership of shares of the Corporation.

Section 2. Transfer of Shares. Shares of the Corporation shall be
transferable on the books of the Corporation by the holder of record
thereof in person or by his or her duly authorized attorney or legal
representative (i) upon surrender and cancellation of a certificate or
certificates for the same number of shares of the same class, duly
endorsed or accompanied by proper instruments of assignment and
transfer, with such proof of the authenticity of the signature as the
Corporation or its agents may reasonably require, or (ii) as otherwise
prescribed by the Board of Directors. The shares of stock of the
Corporation

- 11 -

may be freely transferred, and the Board of Directors may,
from time to time, adopt rules and regulations with reference to the
method of transfer of the shares of stock of the Corporation. The
Corporation shall be entitled to treat the holder of record of any share
of stock as the absolute owner thereof for all purposes, and accordingly
shall not be bound to recognize any legal, equitable or other claim or
interest in such share on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise
expressly provided by law or the statutes of the State of Maryland.

Section 3. Stock Ledgers. The stock ledgers of the Corporation,
containing the names and addresses of the stockholders and the number of
shares held by them respectively, shall be kept at the principal offices
of the Corporation or, if the Corporation employs a transfer agent, at
the offices of the transfer agent of the Corporation.

Section 4. Transfer Agents and Registrars. The Board of Directors may
from time to time appoint or remove transfer agents and registrars of
transfers for shares of stock of the Corporation, and it may appoint the
same person as both transfer agent and registrar. Upon any such
appointment being made all certificates representing shares of capital
stock thereafter issued shall be countersigned by one of such transfer
agents or by one of such registrars or by both and shall not be valid
unless so countersigned. If the same person shall be both transfer agent
and registrar, only one countersignature by such person shall be
required.

Section 5. Fixing of Record Date. The Board of Directors may fix in
advance a date as a record date for the determination of the
stockholders entitled to notice of or to vote at any stockholders'
meeting or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or to receive payment of any
dividend or other distribution or allotment of any rights, or to
exercise any rights in respect of any change, conversion or exchange of
stock, or for the purpose of any other lawful action, provided that (1)
such record date shall be within ninety days prior to the date on which
the particular action requiring such determination will be taken; (2)
the transfer books shall not be closed for a period longer than twenty

days; and (3) in the case of a meeting of stockholders, the record date
shall be at least ten days before the date of the meeting.

Section 6. Lost, Stolen or Destroyed Certificates. Before issuing a
new certificate for stock of the Corporation alleged to have been lost,
stolen or destroyed, the Board of Directors or any officer authorized by
the Board may, in its discretion, require the owner of the lost, stolen
or destroyed certificate (or his or her legal respresentative) to give
the Corporation a

- 12 -

bond or other indemnity, in such form and in such amount as the Board or
any such officer may direct and with such surety or sureties as may be
satisfactory to the Board or any such officer, sufficient to indemnify
the Corporation against any claim that may be made against it on account
of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certficate.

ARTICLE VII
FISCAL YEAR AND ACCOUNTANT

Section 1. Fiscal Year. The fiscal year of the Corporation shall,
unless otherwise ordered by the Board of Directors, be twelve calendar
months ending on the 31st day of May.

Section 2. Accountant.

A. The Corporation shall employ an independent public accountant
or a firm of independent public accountants as its Accountant to examine
the accounts of the Corporation and to sign and certify financial
statements filed by the Corporation. The Accountant's certificates and
reports shall be addressed both to the Board of Directors and to the
stockholders. The employment of the Accountant shall be conditioned upon
the right of the Corporation to terminate the employment forthwith
without any penalty by vote of a majority of the outstanding voting
securities at any stockholders' meeting called for that purpose.

B. A majority of the members of the Board of Directors who are not
"interested persons" (as defined in the 1940 Act) of the Corporation
shall select the Accountant at any meeting held within thirty days
before or after the beginning of the fiscal year of the Corporation or
before the annual stockholders' meeting in that year. The selection
shall be submitted for ratification or rejection at the next succeeding
annual stockholders' meeting. If the selection is rejected at that
meeting, the Accountant shall be selected by majority vote of the
Corporation's outstanding voting securities, either at the meeting at
which the rejection occurred or at a subsequent meeting of stockholders
called for the purpose of selecting an Accountant.

C. Any vacancy occurring between annual meetings due to the
resignation of the Accountant may be filled by the vote of a majority of
the members of the Board of Directors who are not interested persons.

- 13 -

ARTICLE VIII
CUSTODY OF SECURITIES

Section 1. Employment of a Custodian. The Corporation shall place and
at all times maintain in the custody of a Custodian (including any
sub-custodian for the Custodian) all funds, securities and similar
investments owned by the Corporation. The Custodian (and any
sub-custodian) shall be a bank or trust company of good standing having
an aggregate capital, surplus, and undivided profits of not less than fifty
million dollars ($50,000,000) or such other financial institution or
other entity as shall be permitted by rule or order of the Securities
and Exchange Commission. The Custodian shall be appointed from time to
time by the Board of Directors, which shall fix its remuneration.

Section 2. Termination of Custodian Agreement. Upon termination of the
agreement for services with the Custodian or inability of the Custodian
to continue to serve, the Board of Directors shall promptly appoint a
successor Custodian, but in the event that no successor Custodian can be
found who has the required qualifications and is willing to serve, the
Board of Directors shall call as promptly as possible a special meeting
of the stockholders to determine whether the Corporation shall function
without a Custodian or shall be liquidated. If so directed by resolution
of the Board of Directors or by vote of the holders of a majority of the
outstanding shares of stock of the Corporation, the Custodian shall
deliver and pay over all property of the Corporation held by it as
specified in such vote.

Section 3. Other Arrangements. The Corporation may make such other
arrangements for the custody of its assets (including deposit
arrangements) as may be required by any applicable law, rule or
regulation.

ARTICLE IX
INDEMNIFICATION AND INSURANCE

Section 1. Indemnification of Officers, Directors, Employees and Agents.
The Corporation shall indemnify its present and past directors,
officers, employees and agents, and any persons who are serving or have
served at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust, or enterprise, to the full extent provided and allowed by Section
2-418 of the Annotated Corporations and Associations Code of Maryland
concerning corporations, as amended from time to time, or any other
applicable provisions of law. Notwithstanding anything herein to the
contrary, no director, officer, investment adviser or principal
underwriter of the Corporation shall be indemnified in violation of
Sections 17(h) and (i) of the 1940 Act. Expenses

- 14 -

incurred by any such person in defending any proceeding to which he or
she is a party by reason of service in the above-referenced capacities

shall be paid in advance or reimbursed by the Corporation to the full
extent permitted by law, including Sections 17(h) and (i) of the
Investment Company Act of 1940.

Section 2. Insurance of Officers, Directors, Employees and Agents. The
Corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the Corporation,
or is or was serving at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted
against that person and incurred by that person in or arising out of
his/her position, whether or not the Corporation would have the power to
indemnify him or her against such liability.

Section 3. Amendment. No amendment, alteration or repeal of this
Article or the adoption, alteration or amendment of any other provision
of the Articles of Incorporation or Bylaws inconsistent with this
Article shall adversely affect any right or protection of any person
under this Article with respect to any act or failure to act which
occurred prior to such amendment, alteration, repeal or adoption.

ARTICLE X
AMENDMENTS

Section 1. General. Except as provided in Section 2 of this Article X,
all Bylaws of the Corporation, whether adopted by the Board of Directors
or the stockholders, shall be subject to amendment, alteration or
repeal, and new Bylaws may be made by the affirmative vote of a majority
of either: (1) the holders of record of the outstanding shares of stock
of the Corporation entitled to vote, at any annual or special meeting,
the notice or waiver of notice of which shall have specified or
summarized the proposed amendment, alteration, repeal or new Bylaw; or
(2) the Directors, at any regular or special meeting the notice or
waiver of notice of which shall have specified or summarized the
proposed amendment, alteration, repeal or new Bylaw.

Section 2. By Stockholders Only. No amendment of any section of these
Bylaws shall be made except by the stockholders of the Corporation if
the Bylaws provide that such section may not be amended, altered or
repealed except by the stockholders. From and after the issue of any
shares of the capital stock of the Corporation, no amendment, alteration
or repeal of Article X shall be made except by the affirmative vote of
the holders of either: (a) more than two-thirds of the Corporation's
outstanding shares present at a meeting at which the holders of more
than fifty percent of the outstanding shares are present in

- 15 -

person or by proxy, or (b) more than fifty-percent of the Corporation's
outstanding shares.
- 16 -

AMENDMENT TO THE BYLAWS

TRIPLE A GOVERNMENT SERIES - 1997, INC.

Pursuant to Article X of the Bylaws of TRIPLE A GOVERNMENT SERIES -
1997, INC. ("Corporation"), the Corporation adopts the following
Amendment to the By-laws as of May 28, 1992.

FIRST: Section 1 of Article VII Bylaws of the Corporation is hereby
deleted and the following shall be inserted in lieu thereof:

Fiscal Year. The fiscal year of the Corporation shall, unless
otherwise ordered by the Board of Directors, be twelve calendar
months ending on the 30th day of June.

SECOND: The Director hereby waives any notice to a meeting for the
purpose of amending this bylaw.

/s/ Mary Joan Hoene
---------------------------
Mary Joan Hoene
Director

AMENDMENT TO BY-LAWS

TRIPLE A AND GOVERNMENT SERIES - 1997, INC.

CERTIFICATE OF VICE PRESIDENT AND ASSISTANT SECRETARY

I, Joan L. Cohen, Vice President and Assistant Secretary of Triple
A and Government Series - 1997, Inc. ("Fund"), hereby certify that, at a
duly convened meeting of the Board of Directors of the Fund held on
September 28, 1994, the Directors adopted the following resolution:

RESOLVED, that the following language replace the second
sentence and revise the first sentence of Article III, Section 6 of
the Trust's by-laws:

"The right to vote by proxy shall exist only if the
proxy is authorized to act by (1) a written instrument
dated not more than eleven months prior to the meeting
and executed either by the stockholder or by his or her
duly authorized attorney in fact (who may be so authorized
by a writing or by any non-written means permitted by the
laws of the State of Maryland) of (2) such electronic,
telephonic, computerized or other alternative means as may
be approved by a resolution adopted by the Directors."

Dated: August 17, 1995

By: /s/ Joan L. Cohen
----------------------------
Joan L. Cohen
Vice President and Assistant Secretary
Triple A and Government Series, Inc.

New York, New York (ss)

Subscribed and sworn before me this 17th day of August, 1995.

/s/ Jennifer Farrell
- --------------------
Notary Public

JENNIFER FARRELL
Notary Public, State of New York
No. 01FA5026553
Qualified in New York County
Commission Expires April 18, 1996

Exhibit N

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Financial
Highlights" in the Propectus and "Independent Auditors" in the Statement
of Additional Information and to the incorporation by reference of our
report dated August 17, 1995, in this Registration Statement (Form
N-2 No. 33-50996) of Triple A and Government Series - 1997, Inc.

/s/ ERNST & YOUNG LLP

ERNST & YOUNG LLP

New York, New York
August 29, 1995

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<CIK> 887218
<NAME> Triple A and Government Series-1997, Inc.
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1995
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<INVESTMENTS-AT-COST> 40,130
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<PER-SHARE-NAV-BEGIN> 9.44
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